Edited version of private advice

Authorisation Number: 1052112747072

Date of advice: 2 May 2023

Ruling

Subject: Family trust election

Question 1

Can the Family Trust Election (FTE) with the specified individual that was made in the 20XX financial year be varied to a new specified individual?

Answer

Yes.

Question 2

If the answer to Question 1 is yes, can the FTE variation be made on the 20XX income tax return which has not yet been lodged?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commence on:

1 July 20XX

Relevant facts and circumstances

The Trust was settled in April 20XX. At the time of settlement individual A was the sole trustee.

A Family Trust Election was made in the 20XX financial year with individual A as the specified individual.

A Deed of Appointment of Trustee was signed in 20XX to appoint individual B (individual A's now ex-spouse) as a new trustee. Individual A also continued to act as Trustee.

An order of the Federal Circuit Court of Australia made under the Family Law Act 1975 (Cth) stated the following:

"That within 60 days from the date of the transfer of the XXXX Trust Properties under Order 8, individual A shall:

a)    Cause the joint Trust bank account to be closed;

b)    Resign as the trustee of the Trust;

c)    Renounce any claim or entitlement as a beneficiary and/or capital beneficiary of the Trust;

d)    Co-operate with individual B to sign any deed, instrument or other documents required ... to give full force and effect of this order including varying the terms of the trust and stamping any such variation documents."

A Deed of Appointment and Removal of Trustee was signed to remove individual A as a trustee. Individual B continued to act as sole Trustee.

A Deed of Renouncement and Amendment (Parent) was signed stating "pursuant to the Court Order, individual A resigns as a Parent under the Trust".

The Trust has not lodged an income tax return for the year ended 30 June 20XX.

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 126-5(1)

Income Tax Assessment Act 1936 section 272-80

Income Tax Assessment Act 1936 subsection 272-80(5A)

Income Tax Assessment Act 1936 subsection 272-80(5C)

Income Tax Assessment Act 1936 subsection 272-80(5D)

Income Tax Assessment Act 1936 subsection 272-80(6A)

Income Tax Assessment Act 1936 subsection 272-80(8)

Reasons for decision

A trust is a family trust at any time when a family trust election (FTE) for the trust is in force. Generally, an FTE is in force from the beginning of the income year specified in the FTE (the election commencement time).

Section 272-80 of Schedule 2F to the Income Tax Assessment Act 1936 (ITAA 1936) contains the rules regarding FTEs. Among other things, the FTE must also specify an individual who forms the point of reference for defining the family group that is taken into account in relation to the election (subsection 272-80(3)).

FTE variation

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

• the new specified individual was a member of the family of the original specified individual 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 in relation to the trust 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.

Subsection 272-80(5C) of Schedule 2F to the ITAA 1936 states that the trustee of a trust may vary an election so that a different individual (the new individual) is specified for the purposes of subsection (3) as the individual whose family group is to be taken into account in relation to the election if:

a)    an order; or

b)    an agreement; or

c)    an award;

of a kind mentioned in paragraphs 126-5(1)(a) to (f) of the Income Tax Assessment Act 1997 (ITAA 1997) results in the new individual, or a group comprising the new individual and members of the new individual ' s family, having control of the trust under subsection (5D).

Subsection 126-5(1) of the ITAA 1997 includes a court order under the Family Law Act 1975 or under a State law, Territory law or foreign law relating to breakdowns of relationships between spouses.

Section 272-80(5D) of Schedule 2F of the 1936 explains that the new individual, or a group comprising the new individual and members of the new individual's family, have control of the trust for the purposes of subsection (5C) if any of paragraphs 272-87(2)(a) to (g) are satisfied in relation to a group consisting of:

a)    the new individual; or

b)    the new individual and members of the new individual ' s family.

Timing

Subsection 272-80(8) of Schedule 2F of the ITAA 1936 provides that to vary or revoke an election under subsection (5A), (5C) or (6A), the variation or revocation must be made in the trust's return of income for the income year from which the variation or revocation is to be effective.

Application to your circumstances

In this case individual B is the sole trustee of the Trust therefore we accept that a group with individual B as the primary individual controls the Trust for the purposes of subsection 272-87(2)(a) to (g) and section 272-80(5D) of Schedule 2F of the ITAA 1936.

The order of the Federal Court of Australia in relation to the marriage breakdown of individual A and B is an order mentioned in subsection 126-5(1) of the ITAA 1997.

We accept that the relevant condition of subsection 272-80(5C) of Schedule 2F to the ITAA 1936 have been satisfied to allow the Trustee of the Trust to vary the election so that individual B replaces individual A as the primary individual of the Trust. The Family Trust Election variation can be made on the Trust's 20XX Income Tax Return which has not yet been lodged.

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