• Family trusts - concessions

    There are four main reasons to become a family trust:

    • The trust loss measures: A non-fixed trust has a tax loss to be deducted in future years, or certain debt deductions, but the trust could not satisfy the required trust loss tests. By becoming a family trust, the trust is subject to concessional treatment and only one of the trust loss tests – the income injection test – applies, and only in a modified way.
    • A company loss tracing concession: The company loss provisions allow a company that has a non-fixed trust as a shareholder to benefit from a tracing concession. Broadly, the tracing concession applies so that where the relevant interests in a company are held by the trustee of a family trust, a single notional entity that is a person will be taken to own the interests. This means that there is no need to trace past the family trust.
    • The anti-franking credit trading measures: The anti-franking credit trading measures allow the trustee and beneficiaries of a family trust that receives a franked dividend or franked non-share dividend to benefit from a franking credit concession. Broadly, unless the trustee of a non-fixed trust has elected for it to be a family trust, a beneficiary of the trust who does not have a vested and indefeasible interest in so much of the capital of the trust as is comprised by the shares giving rise to the dividends will not be a ‘qualified person’ for the purposes of the holding period rule. Someone who is not a ‘qualified person’ is denied the benefit of the franking credits attached to dividends paid on shares, or interests in shares, acquired by trusts (other than widely held public share-trading trusts).
    • Trustee beneficiary reporting (TBR) rules: Generally, these rules require the trustee of a closely held trust to advise the ATO of certain details about each trustee beneficiary that is presently entitled to a share of the trust’s net income or a tax-preferred amount. This advice must be provided by the due date for lodgement of the closely held trust’s tax return. Trusts that have made an FTE or an interposed entity election (IEE) or that are covered by subsection 272-90(5) of Schedule 2F to the ITAA 1936 are excluded from having to comply with the TBR rules.

    While any kind of trust can elect to be a family trust, the need to pass the family control test restricts the choice to a trust that is not widely held and where a specific family effectively controls the trust.

    Family trust distribution tax (FTDT) at the top marginal rate is payable where a distribution is made to a party that is not a member of the family group of the specified individual specified in the FTE.

    Find out about:

    Family trust elections (FTE)

    An FTE can be made at any time (including in relation to earlier years), provided that from the beginning of the specified income year until 30 June of the income year immediately preceding that in which the election is made:

    • the trust passes the family control test, and
    • any conferrals of present entitlement to, or any actual distributions of, income or capital during that period have been made on or to the specified individual or members of that individual’s family group.

    These rules apply to FTEs specifying the 2004-05 and later income years.

    FTEs for the 2004 or earlier income years could only achieve this by lodging in accordance with Practice Statement PS LA 2004/1 (GA) (Withdrawn). Prior to that Practice Statement, subject to certain transitional rules, FTEs could only be made for the earliest year for which a tax return had not yet been lodged. The election could not be made for the specified income year if it was made after the entity's return for that year has been lodged.

    The ATO releases a form each year for making an FTE, which must be lodged with the ATO. While use of this isn't mandatory, the election must contain all the information specified on the form.

    An FTE doesn't need to be made each year, but the trustee is required to include the income year specified in the FTE on the trust tax return each year while the FTE remains in force.

    Generally, an FTE is in force at all times after the ‘election commencement time’. This time is usually from the beginning of the income year specified in the FTE unless the family control test (FCT) is not passed for the whole of the income year (in which case the 'election commencement time’ is the time from which the trust passes the FCT continuously for the rest of the income year).

    An FTE can't be made for a trust that has previously had an FTE revoked.

    See also:

    FTE revocation

    An FTE can be revoked where the family trust is a fixed trust or where the FTE was not required for deducting tax losses or bad debts, or accessing franking credits (subject to the satisfaction of certain conditions).

    Generally, revocations can be made until the end of the fourth income year after the income year that was specified in the original FTE.

    These revocations must be made in the trust’s tax return for the income year from which the revocation is to be effective. If the entity isn't required to lodge a return for the income year, the revocation must be given to the ATO within two months of the end of that income year, or such later day as the Commissioner allows.

    A tax return that has already been lodged can't be amended to include an FTE, FTE revocation or variation, IEE or IEE revocation.

    The individual specified in the FTE

    An FTE must specify a person as the individual whose family group is to be taken into account in relation to the election (referred to as the specified individual, primary individual or test individual throughout Schedule 2F).

    The specified individual has no additional rights or responsibilities and doesn't even need to be directly associated with the trust.

    Only one individual can be specified in relation to an FTE.

    Where an FTE is being made in respect of an earlier year of income, the specified individual's date of birth must be earlier than or equal to the beginning of the income year specified for the commencement of the FTE.

    The FTE isn't affected by the death of the individual specified in the FTE – the members of the family group are still determined by reference to that individual.

    The specified individual can be varied once only, subject to certain conditions, including that:

    • the new specified individual must be a member of the original specified individual’s family at the election commencement time, and
    • there have been no conferrals of present entitlement, or distributions of income or capital, by the trustee of the family trust or an entity that made an IEE to parties outside the new specified individual’s family group during the period in which the election has been in force.

    Also, the specified individual can be varied if, as a result of a family law order, agreement or award arising from a marriage or relationship breakdown, the control of the trust passes to the new specified individual and/or members of their family.

    Generally, variations can be made until the end of the fourth income year after the income year that was specified in the original election. Variations must be made in the trust’s tax return for the income year from which the variation is to be effective. If the entity isn't required to lodge a return for the income year, the variation must be given to the ATO within two months of the end of the income year, or such later day as the Commissioner allows.

    A taxation return that has already been lodged can't be amended to include a variation.

    Family control test

    For the purposes of making a family trust election (FTE) or an interposed entity election (IEE), a trust passes the family control test (FCT) at a point in time when some or all of the following people control the trust:

    • the individual specified in the relevant FTE (also referred to as the test individual in Schedule 2F)
    • members of the specified individual's family
    • a professional legal or financial adviser to the family.

    The FCT looks at, among other things, who can control the application of income or capital of the trust.

    This is why a professional legal or financial adviser might be part of the controlling group of a family trust (for example, the adviser might be one of the directors of the trustee company). However, a person could only be a controller as a professional legal or financial adviser if they became a controller because of their status as such an adviser, rather than in a personal capacity.

    A company or partnership that proposes to make an IEE passes the FCT at the point in time when some, or all, of the specified individual and members of their family beneficially hold between them, directly or indirectly, fixed entitlements to more than 50% of the income or capital of the company or partnership.

    Because the FCT for companies and partnerships only looks at who beneficially owns interests in the entity, any control influenced by a professional legal or financial adviser isn't relevant to determining whether the family controls a company or partnership.

    Family of the specified individual

    The family of the specified individual (referred to as the test individual in section 272-95) consists of that person and all of the following (if applicable):

    1. any parent, grandparent, brother or sister of the specified individual or the specified individual's spouse
    2. any nephew, niece or child of the specified individual or the specified individual's spouse
    3. any lineal descendant of a nephew, niece or child referred to in point 2
    4. the spouse of the specified individual or of anyone who is a member of the specified individual's family because of points 1, 2 and 3.

    ‘Any lineal descendant’ includes any descendant (of an individual) in a direct line of relationship flowing downwards, starting with an individual's child (including an adopted child, stepchild or ex-nuptial child) and extending to include a grandchild, a great grandchild and so on. They are not restricted to a descendant on either a patriarchal or matriarchal basis.

    A person doesn't cease to be a family member merely because of the death of any other family member.

    The spouse of the deceased specified individual will continue to be a member of the family, provided they were the spouse at the time of death.

    If the individual specified in an FTE is legally married and separated from their spouse, the spouse remains a member of the family. If the specified individual divorces after being legally married, their former spouse won't be a member of the family. However, the former spouse will remain a member of the family group.

    If the spouse of the deceased specified individual or a member of their family becomes the spouse of a person who is not a member of the deceased specified individual’s family, the spouse will cease to be a member of the family. Instead, the former spouse of the deceased specified individual or a member of their family becomes a member of the deceased specified individual’s family group. This means that the former spouse of the deceased specified individual won't have concessionary treatment under the income injection test.

    This diagram shows the ‘family’ that applied from 1 July 2007 as defined in section 272-95 of the Income Tax Assessment Act 1936.

    Family group

    For the purposes of determining whether a conferral or distribution has been made, the following people and entities are generally members of the family group of the specified individual (also referred to as the 'primary' individual in Schedule 2F):

    • the members of the specified individual’s family
    • former members of the specified individual’s family who are no longer members due to a breakdown in a marriage or relationship, or death (including former spouses, former widows/widowers and former step-children)
    • family controlled or owned trusts, companies or partnerships
    • the family trust for which the family trust election has been made
    • other family trusts with the same individual specified in its FTE
    • trusts, companies or partnerships that have made an IEE (see below) to become a member of the specified individual’s family – IEE only needed where the members of the family group don't have fixed entitlements directly or indirectly, and for their own benefit, to all of the income and capital of the company, partnership or trust
    • trusts, companies or partnerships (other than non-fixed trusts) where certain members of the family group have fixed entitlements directly or indirectly, and for their own benefit, to all of the income and capital of the trust, company or partnership
    • deductible gift recipients in Australia
    • bodies all of whose income is exempt from income tax.

    Interposed entity elections (IEE)

    There are two main reasons to make an IEE:

    • To make an entity a member of the family group of the individual specified in an FTE. This means that the trustee of the family trust can make distributions of, or confer present entitlement to, income or capital of the family trust to the entity that made the IEE without the trustee becoming liable for FTDT.
    • To exclude a trust from having to comply with the trustee beneficiary reporting rules in Division 6D of Part III of the ITAA 1936.

    An IEE can't be made for a company, partnership or trust unless it's controlled by the relevant family from the time the election comes into effect – specifically, it must pass the family control test (FCT) by the end of the income year.

    The trustee of a family trust can make an IEE after the death of its test individual as, once a valid FTE is in force, it isn't affected by the death of the test individual.

    A company, partnership or trust may make more than one IEE provided each family trust with which the entity is interposed has the same individual specified in its FTE.

    The trustee of a family trust can make an IEE to be included in the family group of another family trust where the specified individuals are not the same, as long as it hasn't already made another IEE to be included in the family group of a different specified individual, and the respective FCT is passed for each election (for example, where the specified individuals are brothers).

    The trustee of a trust may make both a FTE and an IEE provided the respective FCT is passed for each election.

    A superannuation fund may make an IEE provided it passes the FCT.

    An IEE can be made at any time (including in relation to earlier years), provided that from the beginning of the specified income year until 30 June of the income year immediately preceding that in which the election is made:

    • the entity passes the FCT
    • any conferrals of present entitlement to, or any actual distributions of, income or capital during that period have been made on or to the specified individual or members of that individual’s family group.

    The ATO releases a form each year for making an IEE. While use of this form isn't mandatory, the election must contain all the information requested on the form.

    An IEE doesn't need to be made each year, but the entity is required to include the income year specified in the IEE on the entity’s tax return each income year.

    These rules apply to IEEs specifying the 2005 and later income years.

    See also:

    IEE revocation

    An IEE can be revoked where an entity was at the election commencement time, or becomes at a later time, a member of the family group of the specified individual (for instance, where members of the family have fixed entitlements, directly or indirectly, and for their own benefit, to all of the income and capital of the entity or where a family trust has the same specified individual as another family trust in relation to which it makes an IEE).

    In addition to this, an IEE is taken to be automatically revoked if the FTE to which it relates is revoked.

    Generally, revocations can be made until the end of the fourth income year after the income year that was specified in the original election.

    These revocations must be made in the entity’s income tax return for the income year from which the revocation is to be effective. If the entity isn't required to lodge a return for the income year, the revocation must be given to the ATO within two months of the end of that income year, or such later day as the Commissioner allows.

    A taxation return that has already been lodged can't be amended to include an IEE revocation.

    Family trust distribution tax

    Family trust distribution tax (FTDT) is payable where:

    • a trustee of a trust has made a family trust election (FTE)
    • a partnership's partners, a company or the trustee of a trust have made an interposed entity election (IEE) to be included in the family group in relation to the family trust, and
    • the trust, partnership or company distributes income or capital other than to the test individual or members of the test individual's family group.

    FTDT is payable at the top marginal rate of tax applying to individuals plus Medicare levy (currently 49%) on the amount or value of any such distributions or conferrals made by an electing entity at any time after the election made by the entity becomes effective.

    A reasonable salary, wage or other benefit (such as superannuation contributions or fringe benefits) provided to, or for the benefit of, an employee for work performed is not considered to be a distribution. There is only a distribution, on which a liability to pay FTDT arises, to the extent that it exceeds an amount commensurate with commercial rates for the type of work or services provided by the employee.

    Each payment of FTDT must be accompanied by the Family trust distribution tax payment advice (NAT 6175).

      Last modified: 27 Apr 2016QC 48752