Trusts are a constant focus area of the Australian Taxation Office (ATO). Recent compliance assurance reviews have raised a myriad of compliance issues with family trust elections (FTEs). Complex legislation, confusion around the record keeping of FTEs and interposed entity elections (IEEs) can inadvertently result in family trust distribution tax (FTDT) liabilities.

Common traps

Below is a list of some common traps that members have encountered resulting in FTDT liabilities.

• Gaps in record keeping – In reality, clients generally keep their tax records for around 7 years. To create a complete picture of a client’s affairs, accountants turn to the ATO’s Online Services for Agents (OSfA) report on FTEs and IEEs for confirmation of the FTE status of a trust. Unbeknownst to many, between 2020 and August 2025, OSfA has had issues with FTE and IEE records which meant that information recorded or accessed in the ATO’s systems during that period could not be relied upon. This has caused issues for many members.
  
  Example: After checking with their client and calling the ATO to confirm whether a trust had made a FTE, an accountant concluded that a FTE had not been made for a trust and proceeded to lodge a FTE for the trust. The ATO later contacted the accountant and advised that the trustee made a FTE 20 years ago with a different specified individual.
• Change in accountants – Where a client with a family trust has changed accountants, the record of the FTE can drop off the trust’s tax return.
  
  Example: An accountant inherited a client with a trust. The accountant obtained confirmation from the previous accountant that no FTE had been made. The last 4 years of trust tax returns did not have the FTE box ticked. The accountant lodged a FTE for the trust, however, the ATO later informed the accountant that a FTE has been made for their trust client over a decade ago with a different specified individual.


• Complexity in determining who is within the family group – the restrictive definition of “family group” and “family control test” can lead to distributions to an entity that is technically outside the family group but within the economic family group.
  
  
  • A specified individual’s family members may have set up their own discretionary trusts. If these discretionary trusts make a FTE to become family trusts (family members family trusts), the family members family trusts are not necessarily in the same family group as the specified individual’s family trust, unless the family members family trusts have named the same specified individual. Distributions between family trusts with different specified individuals, even though they are within the same family, can trigger FTDT.
    
    Example: A trust has made a FTE with the specified individual being Dad (DFT). DFT made a distribution to Emily Family Trust (EFT), Dad’s daughter’s trust that has made a FTE with Emily as the specified individual. Even though EFT is controlled by Emily, EFT is not within Dad’s family group as EFT has a different specified individual. EFT must make an IEE in respect of DFT to be part of Dad’s family group.
  
  
  • Invalid IEEs because the entity does not satisfy the ‘family control test’. To make a valid IEE from a specified income year, the entity must pass the family control test at the end of the income year.
    
    Example: Following from the above example, DFT wants to distribute to EFT. EFT makes an IEE in respect of DFT which means EFT can only distribute to entities within Dad’s family group and Emily’s family group. Emily decides to incorporate a company which is 100% owned by EFT and is a beneficiary of DFT. Even though EFT is within Dad’s family group, the company is not within Dad’s family group because the company’s shares are owned by EFT which has a different specified individual. The company cannot make a valid IEE in respect of DFT as it fails the ‘family control test’. EFT, which has a different specified individual, has fixed entitlements to all the income and capital of the company.
  
  
  • A company, which is wholly owned by the specified individual and family members, may not be part of the specified individual’s family group if there are dividend access shares or shares with discretionary rights to income or capital issued to entities who are not the specified individual or family members. In this situation, the ATO considers that the specified individual and family members do not have fixed entitlements to all income and capital of the company. The company may also fail the family control test as the ATO considers that the specified individual and family members do not have fixed entitlements to greater than 50% share of the income or capital of the company. Therefore, any IEE the company makes to be part of the family group of the specified individual of a family trust would likely be invalid.
  
  
• ‘Distribution’ for FTDT is broad – Distributions for FTDT includes trust distributions, partnership distributions and company dividends depending on the entity with the election. It can also include broader transactions with beneficiaries, partners, shareholders and other persons. Transactions include:
  
  • payments (including loans), credits or reinvestment for a person
  • transfers or use of property
  • deals with money or property for or on behalf of a person or as the person directs
  • forgiveness or waiver of debt where the transaction exceeds the consideration given in return.

Example: A client with a family trust invests money in a friend’s business venture by providing an interest-free loan from their family trust to the business venture. As the friend is outside the family group, this transaction would trigger FTDT.

Example: A husband and wife conduct separate businesses through separate family trusts. The husband’s trust has a FTE naming himself as the specified individual. The wife’s trust has a FTE naming herself as the specified individual. The husband’s business was under financial stress so the wife loaned money interest-free to the husband’s business from her family trust. This would trigger FTDT.

Conclusion

These common traps highlight why the current FTE framework is increasingly difficult to navigate in practice and why targeted reform is needed to reduce unintended FTDT consequences which can be significant over time.