Family trust elections (FTEs) were introduced in the late 1990s as a targeted integrity measure to prevent the trafficking of trust losses. Nearly 30 years on, those rules are creating serious and unintended consequences for family businesses and the CA ANZ members who advise them.

FTEs have become a source of significant compliance risk, uncertainty and, in some cases, existential outcomes, not because of aggressive tax planning, but because the law has failed to keep pace with modern business realities. Although family trusts are often associated with wealthy groups, these issues affect businesses of all sizes.

Where the system is breaking down

FTE issues are most often arising due to inadequate records, outdated definitions and the cumulative impact of adviser changes over time. For many years, Australian Taxation Office (ATO) records of elections were incomplete or unreliable, making it difficult to confirm whether an election had been made decades earlier, or who the specified individual was at the time.

That uncertainty is now colliding with increased compliance activity by the ATO. In some cases, FTE issues from decades ago, are only being identified now despite numerous ATO Top 500 and Next 5000 reviews being completed. The length of time taken to identify FTE issues is concerning as the passing of time can mean that key individuals may have passed away and practical remediation options become extremely limited.

The consequences can be severe. Family trust distribution tax (FTDT) applies automatically to distributions outside the defined family group and is subject to an unlimited review period. This means FTDT liabilities can be discovered many years after the relevant distribution, with general interest charge (GIC) compounding over time resulting in liabilities that are wholly disproportionate to the underlying conduct.

Short term priorities: certainty and proportionality

A group of CA ANZ members are working closely with the CA ANZ Tax Team to generate practical solutions to these problems. Possible solutions have been discussed extensively at the ATO’s Private Group Stewardship Group and with other industry bodies. 

CA ANZ has also written to Treasury calling for urgent legislative changes to the FTE provisions to address the most acute risks. In this letter CA ANZ calls for:

• a one-off opportunity for trustees to revoke or vary FTEs and interposed entity elections (IEEs) outside the current 4-year limit
• a 4-year amendment period for FTDT liability to improve certainty and fairness
• providing the Commissioner with discretion to disregard or reduce FTDT for inadvertent breaches
• broadening the definitions of “family group” and “family control” to accommodate contemporary family structures
• permitting automatic revocation of elections upon sale to third parties.

Treasury has engaged with CA ANZ to discuss these issues in further detail. Initial discussions have been constructive, and CA ANZ looks forward to continuing to work with Treasury on these matters.

Long term reform: reducing red tape and modernising the law

Looking beyond immediate relief, CA ANZ has also highlighted FTEs as a priority area in its submission to the Board of Taxation’s red tape reduction review. The FTE regime is a clear example of tax law that has become overly complex, administratively inefficient and misaligned with contemporary family and business structures.

Longer term reform could involve removing the concept of family trusts altogether and embedding appropriate safeguards directly into the franking credit and loss provisions. Alternatively, an option could involve updating the FTE provisions, repealing FTDT, but denying access to franking credits and losses where distributions are made outside the family group.

These changes would materially reduce compliance costs and allow advisers to focus on supporting productive investment and growth.

What happens next?

CA ANZ will continue working closely with Treasury, the ATO and the Board of Taxation to press for both short term relief and longer-term reform. The CA ANZ Tax Team encourages members to provide feedback and real world examples to support reform. Please provide your feedback to [email protected].