Family trusts are a popular structure for wealth management and minimising tax. By making a Family Trust Election (FTE), trustees can access certain tax benefits, but the Australian Taxation Office (ATO) has significantly increased its scrutiny of these arrangements. While the rules can be complex, they are vital to avoid significant financial penalties and ensure your trust’s benefits remain intact.
Understanding Family Trust Elections (FTE)
A Family Trust Election is a formal declaration to the ATO that binds your trust to a specific “family group” for tax purposes. The trust must:
- Identify a “test individual” whose family group determines the boundaries for permissible distributions.
- Ensure that all distributions remain within the defined family group, as outlined in Division 272 of the Income Tax Assessment Act 1936 (ITAA 1936).
The election, once lodged with the ATO, is generally irrevocable. This means that it permanently locks the trust into a specific family group, even after the death of the test individual. However, FTEs can be applied retrospectively to a prior income year if certain conditions are met.
What Happens if the Rules Are Breached?
Failing to make an FTE correctly or breaching its rules can have severe financial consequences:
- Higher Tax Rates: Trust income may be taxed at 47%, far higher than the company tax rate (25%) or personal marginal tax rates.
- Loss of Tax Benefits: You risk losing valuable franking credits and the ability to carry forward losses, placing unnecessary strain on your finances.
This tax is applied to ensure concessional tax benefits are confined to the specified group, discouraging misuse of the structure.
Benefits of Family Trust Elections
From a financial perspective, an FTE offers several advantages:
- Tax Loss Flexibility: Trusts can carry forward losses and bad debts without being subject to complex trust loss tests.
- Simplified Franking Credits: When distributing income from investments, franking credits can flow to beneficiaries without additional complications.
- Income Splitting: Trustees can distribute income strategically to beneficiaries in lower tax brackets, maximising after-tax income for the family group.
- Succession Planning: Family trusts provide a flexible vehicle for estate and succession planning, allowing for structured asset transfer across generations.
ATO’s Compliance Crackdown: What You Should Know
The ATO has intensified its compliance activity around family trusts, particularly among high-net-worth groups. Key areas of focus include:
- Valid Elections: Ensuring that FTEs are properly documented and lodged on time.
- Distributions Outside the Family Group: Identifying instances where trusts distribute income to non-family members, triggering FTDT liabilities.
- Record-Keeping: Verifying that trustees maintain adequate documentation to demonstrate compliance with FTE rules.
- Data Matching: Using advanced data analytics to detect discrepancies in reported distributions and trust declarations.
In November 2024, the ATO updated its guidance on FTE rules and launched webinars to educate taxpayers on compliance and risk areas. Trustees should take advantage of these resources to remain informed and prepared.
Practical Considerations for Trustees
To avoid compliance issues and financial penalties, trustees should:
- Review FTEs Annually: Regularly reassess the suitability of elections and ensure all distributions align with the rules.
- Understand the Trust Deed: Be aware of specific provisions, such as default distributions, and ensure resolutions are made before 30 June.
- Plan Distributions Strategically: Finalise income allocations early to avoid rushed decisions or errors.
- Engage Professional Advice: Seek guidance from financial and legal experts to navigate complex scenarios and ensure compliance.
Family trusts remain a valuable tool for wealth management, offering significant tax and succession planning benefits. However, the ATO’s heightened focus on FTE compliance means trustees must exercise diligence in their governance and decision-making. By maintaining accurate records, staying informed of regulatory changes, and consulting with professionals, trustees can safeguard their trusts from financial risks and maximise the benefits of this powerful structure. As the ATO continues its crackdown, proactive management of family trusts is more important than ever.
Why Growth IQ is the Partner You Need
At Growth IQ, we specialise in ensuring FTE compliance is seamlessly integrated into your tax and accounting strategy. Our proactive approach to managing family trusts sets us apart:
- Proactive Tax Planning: We conduct thorough reviews of family trust structures during the tax planning process, uncovering opportunities for tax minimisation while ensuring compliance.
- Ongoing Reviews: Whether preparing year-end financial statements or tax returns, we prioritise accurate FTE documentation and address any compliance concerns promptly.
- Specialised Expertise: Our dedicated team stays ahead of legislative changes and ATO developments, providing clients with up-to-date advice and guidance.
- Practical Support: We assist with making or amending Family Trust Elections where necessary, offering clear, actionable recommendations tailored to your needs.
Choosing Growth IQ means partnering with a team that prioritises your financial security and long-term success. Our comprehensive services give you peace of mind, knowing your trust is fully compliant and optimised for your goals.
Whether you’re a current client or considering a review of your family trust arrangements, Growth IQ is here to help. Contact us today to book a compliance health check and ensure your trust is structured correctly to meet the ATO’s requirements.