A family trust election (FTE) is a formal decision made by a trustee to have their discretionary trust recognised as a “family trust” under Australian tax law. Once the election is made, the trust gains access to significant tax concessions — but is also bound by strict rules about who can receive distributions.
Understanding whether to make a family trust election is one of the most important decisions a trustee can make. This guide explains everything you need to know.
How Does Tax Law Classify Trusts?
Before diving into the election itself, it helps to understand how Australian tax law distinguishes between different types of trusts:
Fixed trusts are trusts where each beneficiary holds a fixed entitlement to the trust’s capital and income. A listed property unit trust is a common example.
Non-fixed (discretionary) trusts are trusts where the trustee has discretion over how income and capital are distributed each year. Most family businesses in Australia use this structure.
A family trust is a specific type of discretionary trust where the trustee has formally lodged a family trust election with the ATO. Without that election, it’s simply a discretionary trust and misses out on the benefits below.
Why Make a Family Trust Election?
Australian tax law includes a range of anti-avoidance rules designed to prevent trusts being used to minimise tax. Many of these rules place significant restrictions on discretionary trusts. Making a family trust election allows a trust to bypass many of these restrictions. Here’s how:
1. Passing on franking credits
If the trust receives dividends from Australian companies, a valid FTE may allow franking credits to be passed on to beneficiaries. Specifically, the FTE may allow a beneficiary’s interest in shares held by the trust to be treated as held ‘at risk’. Both the beneficiary and the trust must hold the shares ‘at risk’ for a continuous period of at least 45 days (or 90 days for preference shares) during the qualification period to access the franking credits. Without an FTE, those franking credits may be lost.
In addition, a FTE allows streaming of dividends to members of the family group. Without an FTE in place, the trustee cannot stream dividends to a specific beneficiary, making tax planning significantly harder.
2. Carrying forward company losses
A common business structure is a company owned by a discretionary trust. If that company makes a capital loss, it can normally only be carried forward if it satisfies the “continuity of ownership” test. A family trust election makes it much easier to satisfy this test, allowing losses to offset future capital gains and reduce CGT liability.
3. Using trust tax losses and writing off bad debts
Discretionary trusts face strict tests — the “pattern of distribution test” and the “control test” — before they can access prior-year revenue losses or write off bad debts. A family trust election removes the need to pass these tests, making it simpler to use existing losses.
4. Satisfying the income injection rules
The income injection rules prevent trusts from “injecting” income into a loss trust purely to absorb those losses. However, if both trusts have made a family trust election (or an Interposed Entity Election), the distribution may be permitted — allowing losses to be legitimately absorbed.
Note: the income injection test still applies to family trusts, but only in a modified (more favourable) form.
5. Reduced reporting obligations
A family trust may avoid the Trustee Beneficiary Reporting (TBR) requirements that apply to other discretionary trusts, reducing compliance obligations.
6. Small business restructure roll-over
Small business entities can restructure their business by moving active assets into, or out of, a trust, company, partnership, or a combination, without adverse capital gains tax consequences. Special rules apply in this context to discretionary trusts that have made FTEs.
FTE Summary
The table below highlights key differences between rules for the different types of trust and therefore when an election might make sense.
|
Type of trust |
Tests required to claim tax revenue losses and bad debts |
Pass on franking credits |
Income injection test |
Family control test required? |
|
Fixed Trust |
50% stake test |
Yes |
Yes |
No |
|
Non-Fixed Trust (Discretionary Trust) |
Pattern of Distribution Test and Control Test |
No |
Yes |
No |
|
Family Trust |
No test required |
Yes — subject to 45/90-day holding period rules |
Yes — in modified form only |
Yes — must pass FCT at end of specified income year |
How to Make a Family Trust Election
The election is made in writing using the approved ATO form. As part of the process, the trustee nominates a specific person called the test individual. This is typically the central family member (for example, the business owner or patriarch/matriarch of the family).
The choice of test individual is critical, because the entire family group is defined by reference to that person, and the election is very difficult to reverse.
The trust must also pass the family control test (FCT) at the end of the specified income year before an FTE can be made. The FCT broadly tests who controls the income or capital of the trust. It is satisfied when the specified individual, members of their family, or a professional legal/financial adviser to the family control the trust. Only one FTE can be made for a trust.
Important: the specified individual must be alive between the election commencement time and the making of the election. An FTE cannot be made for a person who is deceased or has not yet been born.
Who is in the family group?
Once the test individual is nominated, the “family group” includes:
- The test individual and their spouse
- Any parent, grandparent, brother, or sister of the test individual (or their spouse)
- Any child, nephew, niece, or lineal descendant of the test individual (or their spouse), and their spouses
- Other family trusts with the same individual specified in their FTE
- Certain former family members who are no longer members due to a breakdown in relationship or death (including former spouses, former widows/widowers, and former stepchildren)
- Deductible gift recipients in Australia and bodies whose income is entirely exempt from income tax
The family group can also include companies, partnerships, and trusts that are wholly owned by family group members, or that have made an Interposed Entity Election (IEE).
Important limitation: non-fixed trusts that have made an FTE specifying a different individual are NOT part of the family group — even if that other individual is a family member of the specified individual. This is a common trap in succession planning.
Note on the death of the specified individual: if the specified individual dies, they remain the specified individual in the FTE. The members of the family group continue to be determined by reference to that individual.
Relationship between test individual and the family group
What Are the Risks of a Family Trust Election?
The main risk is straightforward but serious: any distribution made outside the family group will be subject to Family Trust Distribution Tax (FTDT).
FTDT is charged at the top personal marginal rate plus the Medicare levy — currently 47%. This applies regardless of the recipient’s own tax rate, making it an extremely costly mistake.
Additional FTDT rules to be aware of:
- FTDT generally becomes due and payable 21 days after the date on which the distribution occurs.
- General interest charge (GIC) begins to accrue 60 days after FTDT becomes due. If distributions are identified years later, GIC can be substantial — in some cases exceeding the original FTDT liability.
- From 1 July 2025, GIC incurred on FTDT is no longer deductible. GIC incurred before 1 July 2025 remains deductible for 2024–25 and earlier income years.
- The ATO has no discretion to disregard or ignore FTDT once identified. There is no time limit on issuing an FTDT notice of liability.
- The concept of ‘distribution’ is broader than ordinary trust distributions. It can include loans (including interest-free loans), use of property, credits, transfers, and forgiveness of debt where the transaction exceeds the consideration given in return. This applies even if the recipient is not a beneficiary of the trust.
This is why the choice of test individual matters so much. If the trust ever needs to distribute to someone outside the family group — a business partner, an investor, or even a distant relative — that distribution will be heavily penalised.
Other traps to be aware of:
- The election is very difficult to revoke once made
- Trust deeds must be reviewed to ensure they permit the election
- Complex rules apply when dealing with losses, franking credits, and interposed entities
- Structuring errors made before understanding the FTE rules can limit your options later
- Where an entity makes an IEE to join the family group, FTDT also applies to distributions made by that entity outside the family group — not just distributions from the family trust itself. This is a significant additional exposure.
Revoking or Varying a Family Trust Election
Revocation is only available in limited circumstances. An FTE can be revoked where:
- the family trust has since become a fixed trust, or
- the FTE was not required for recouping tax losses, deducting bad debts, or accessing franking credits (subject to certain conditions).
Revocations must generally be made by the end of the fourth income year after the income year specified in the original FTE. Revocations cannot be backdated. Importantly, a new FTE cannot be made for a trust that has previously revoked an FTE.
An FTE is not taken to be revoked on the death of the specified individual. The trustee cannot revoke the FTE on the death of the specified individual unless another revocation criterion applies.
The specified individual can be varied — but only once — subject to conditions. The new specified individual must have been a member of the original specified individual’s family at the time the election commenced, and no distributions outside the new specified individual’s family group must have been made during the period the election has been in force. Variations also generally cannot be backdated beyond the fourth income year after the specified income year.
Record Keeping Obligations
The trustee of a family trust is required to:
- Include certain information about the FTE on the trust tax return for every year the FTE remains in force.
- Keep written records of the original FTE until generally 5 years after the trust is no longer required to lodge income tax returns. The same obligations apply to entities with IEEs.
- It is best practice to keep written records of elections while family trusts and interposed entities are making and receiving distributions. Trustees should review their FTE and IEE obligations on at least an annual basis and treat elections as a live compliance matter — not ‘set and forget’.
Is a Family Trust Election Right for You?
A family trust election is a powerful tool — but it’s not right for every trust. It’s most beneficial when:
- The trust regularly receives dividend income with franking credits
- The trust or an associated company has carried-forward tax losses
- The trust structure is stable and unlikely to need distributions outside the core family group
- You want to simplify compliance and reporting obligations
If your trust needs flexibility to distribute outside a defined family group, or if the ownership structure is likely to change, an FTE may create more problems than it solves.
Get Advice Before Making a Family Trust Election
A family trust election has significant, long-term tax consequences. Getting it wrong (including choosing the wrong test individual) can limit your flexibility for years and result in tax bills of up to 47 cents in the dollar on distributions.
The team at JD Scott + Co specialises in trust structures, tax planning, and SMSF management for Australian SMEs. If you’re considering a family trust election — or want to review your existing trust structure. We would love to help, contact us today.
