Login
iscover
Practitioners are warning taxpayers to be wary of the common pitfalls and risks associated with family trust elections, despite their valuable tax concessions.
Taxpayers warned to steer clear of family trust distributions tax trap
03 July 2025
•
8 minute read
Family trust elections (FTE) are a popular area with worthwhile tax concessions; however, taxpayers must be careful of triggering the family trust distributions tax (FTDT), which is levied at 47 per cent.
Nitin Saby, tax advisor and former ATO director, said the FTE and FTDT provisions were complex, poorly understood and could lead to significant tax pitfalls for family businesses and private groups.
You’re out of free articles for this month
To continue reading the rest of this article, please log in.
Create free account to get unlimited news articles and more!
“As a tax advisor with over 15 years of experience, I often see confusion surrounding FTEs and interposed entity elections (IEE) under Schedule 2F of the Income Tax Assessment Act 1936,” he said.
“The points of complexity stem from them requiring precise compliance with ATO-approved forms, such as family trust election, revocation or variation 2024 and involved choosing a ‘test individual’ whose family group defines permissible distributions.”
According to Grant Thornton, there were important limitations associated with family trusts and the election of a test individual, as once a trust became a family trust, distributions could only be made within the ‘family group’ without triggering FTDT.
Those included within the family group stemmed to the test individual’s spouse, any parent or grandparent and siblings, as well as companies, other trusts and partnerships, given that members of the family group held fixed interests in them.
Dharav Gandhi and Paul Banister, Grant Thornton partners, said a misstep in FTE triggered FTDT, which was levied at the top marginal tax rate plus the Medicare levy (currently totalling 47 per cent), demonstrating that FTEs should only be made after careful consideration of all implications.
“Trusts are widely used by private and family groups to protect and preserve wealth. As these groups grow, the number of trusts often increases, requiring more sophisticated and coordinated management,” Gandhi and Banister said.
“In this context, understanding the complexities of trust administration becomes essential.”
Saby noted that the most frequent trigger for FTDT was when members of a family trust inadvertently made distributions to someone not within the specified family group through payments, credits, loans, or transfers of property.
This could occur due to poor record-keeping or unclear beneficiary registers and complex family structures or succession planning issues, especially when the specified individual in an FTE died or was unchanged, which would lead to mismatched family groups across related trusts.
According to Saby, there was heightened ATO scrutiny towards the compliance of FTE and FTDT, adding to the cruciality of abiding by it properly.
“There is a clear trend of the ATO targeting high-net-worth and multi-generational private groups for FTDT compliance, especially where structures are longstanding or involve generational wealth transfers,” he said.
“Inadequate documentation, failure to update FTEs after changes, and not properly identifying all members of the family group are leading causes of unexpected FTDT liabilities.”
To avoid FTDT and ensure compliance, Saby advised members of FTEs to ensure they were meticulous with record-keeping, they were actively reviewing trust deeds, seeking professional advice on a frequent basis and were monitoring legislative and case law developments.
“FTDT is a complex and high-risk area. Practitioners and trustees must be vigilant about the family group definition, succession planning, and compliance with all legislative requirements to avoid punitive tax outcomes.”
You need to be a member to post comments. Become a member for free today!
