iscoverCalls on the government to reform the family trust rules are continuing to arise as the area remains a contentious topic within the tax community based on its increasing complexity.
Family trust rules in desperate need of reform, CPA warns
12 November 2025
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9 minute read
The tax community is urging the government to turn its attention to family trust rules and seek to reform the area as more Australian businesses and families begin to buckle under their complexities and penalties.
CPA Australia is calling on Treasury and the government to “act now” and legislate a fairer, more modern framework to allow for the correction of genuine errors and provide the ATO with limited discretion to remit family trust distribution tax (FTDT) where no tax avoidance occurred.
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The call comes after the news that one of Australia’s wealthiest families (the Thomas case) is facing a $13.2 million tax bill for an administrative mistake.
Jenny Wong, CPA Australia tax lead, said that while the Thomas case was “headline-grabbing” and involved big numbers, the issue at stake ran much deeper as it threatened thousands of ordinary family businesses across Australia.
“At the heart of the problem is Australia’s family trust election rules – an anti-avoidance measure introduced in the late 1990s to prevent the trafficking in trust tax losses that provided benefits to a person who did not bear the economic loss,” she said.
“These rules were designed to ensure tax benefits remained within a defined 'family group'. But in practice, they’ve become a complex trap, where a simple paperwork error can trigger an FTDT of 47 per cent, the top marginal rate, with no discretion for the ATO to provide relief.”
According to Wong, the Thomas family had been hit with the $13.2 million FTDT bill based on accountants inadvertently nominating the wrong individual as the head of the family group.
It was added that the Thomas family had also been hit with this whopping bill despite no tax avoidance, no mischief and no revenue loss to the government, which Wong attributed to the Tax Office having no power to waive or correct the outcome, which left the Federal Court as the only avenue for resolution.
“This is not an isolated problem,” Wong said, “CPA Australia has heard from members, including small business accountants, family farmers and tradespeople, facing devastating liabilities arising from innocent mistakes made years, even decades, ago.”
Robyn Jacobson, senior tax advocate, recently dubbed family trust elections and FTDT as the “sleeping giant that had awoken” as the 30-year-old tax law was outdated, difficult to navigate and terribly unforgiving.
In a column submitted to Accountants Daily, Jacobson said, “the complex nature of these provisions and insufficient ATO guidance continues to create confusion, resulting in tax practitioners hitting roadblocks and clients facing unforeseen tax liabilities”.
“While the provisions have been in effect since 9 May 1995, a lack of understanding of the complex provisions, and a lack of attention from the ATO and the courts over the decades, has resulted in a lack of regard for these rules, poor compliance and honest mistakes.”
“But the sleeping giant has awoken. Practitioners across the country are reporting an emerging issue: the application of the FTDT provisions to both historical and current arrangements, giving rise to significant, unexpected tax bills.”
Wong said CPA was increasingly concerned with the consequences of an error in family trust elections, as they could be severe and disproportionate to the nature of the mistakes.
Another point made included daily compounding interest, as a $400,000 FTDT liability from 2024 could now exceed $5 million.
Wong said the underlying issue was that family trust elections were inflexible.
“They can’t easily be amended to reflect intergenerational change, genuine administrative error or unforeseen events like the death of a test individual. Yet, the ATO’s systems, including the tax agent portal, don’t consistently record past elections, meaning even diligent advisers can be blindsided,” Wong said.
“This is an unsuitable position for taxpayers, their advisers and for the integrity of the system. When honest mistakes attract penalties more severe than deliberate evasion, confidence in the fairness of tax administration suffers.”
In its call for reform, CPA said it wanted Treasury and government to introduce a statutory limitation period as it would prevent the endless resurrection of historical liabilities that were unforeseeable at the time.
“Family trusts remain a cornerstone of Australian business and succession planning. They deserve rules that reflect contemporary practice, not a system that punishes compliance failures from decades past,” Wong said.
“Without reform, we risk seeing more families, not just the billionaires on the rich list, but the small businesses that make up the backbone of our economy, dragged into costly litigation for mistakes that should never have been fatal.”
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