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Family trust elections in ATO sights

Super

The ATO is “cracking down” on family trust elections, warns a leading legal specialist.

By Keeli Cambourne 12 minute read

Daniel Butler, director of DBA Lawyers, said he is seeing a number of clients being picked up by the ATO for distribution outside the family group.

“For example, if you seeded a family trust with $1 million of capital, then made a family trust election (FTE) and decided to distribute outside of the family group as defined in Division 272 of the ITAA 1936, that would be subject to a 47 per cent tax, which is called family trust distribution tax,” he said.

“The ATO has been upgrading its materials and sending out messages [about this], so it is important to be very careful if you do have a family trust, that if you have made an FTE that you do keep that in mind moving forward.”

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Butler said although there are technical issues that need to be dealt with regarding family trusts, they are still a sound option to consider for SMSF members wanting to invest outside of super and in terms of estate and succession planning.

“There are quite a few people, for instance, seeking to withdraw money from super due to the $3 million division 296 cap that is due to start from 1 July 2025. A family trust can be a useful vehicle to consider for these people to invest in outside of an SMSF,” he said.

He continued that in a broad overview of the family trust tax position, there is the flexibility of income splitting, and trustees can allocate any net income to different beneficiaries from year to year.

“You can pick and choose [who to distribute to], and you can also use a company if you want to access a 30 per cent tax rate,” he said.

“Beneficiaries are taxed individually on the amount that is allocated and distributed to them provided you have the valid resolutions prior to midnight 30 June. Typically, the distributions made on or before 30 June result in a present entitlement payable by the trust to the beneficiary.”

Butler warned that as midnight is considered the next day, it is best to get these distributions finalised before then, but that it is also important to look at the trust deed as it may have a specific time already in place to make these distribution allocations.

“Unless you have valid distribution resolutions pre-30 June, you pay the 47 per cent tax rate unless there's a default distribution,” he said.

“There is no such thing as a standard family trust as per CPT Custodians, a 1998 High Court decision. If there are no trustee resolutions effected by 30 June, you need to read the trust deed and find out whether there is a default distribution or an accumulation at 47 per cent or some other alternative under the deed.”

He added that for a capital gain distributed to an individual, there is a potential 50 per cent CGT discount, and capital gains can be streamed under Division 6E of the Income Tax Assessment Act 1936.

He concluded that family trusts are useful succession vehicles, but they do come with some management.

“However, they're probably easier to manage overall than a superfund because with a superfund you have the potential of an audit error that could impose an administration penalty from 1 July of $20,000,” Butler said.

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