Navigating the new landscape of Family Trust Distribution Tax

A recent update from Amy James-Velagic, Assistant Commissioner for the Tax Office’s Private Wealth group, has focused on family trusts, particularly the Family Trust Distribution Tax. The Tax Office has emphasised the importance of reviewing family trust elections, highlighting that many taxpayers and advisers neglect to reassess these elections to confirm their ongoing suitability and often overlook potential liabilities related to family trust distribution tax. The Assistant Commissioner specifically pointed out several areas of concern:

• Inadequate record keeping and succession planning, intergenerational expansion of businesses, and the evolution of private groups 
• A lack of understanding regarding the future consequences and limitations of family trust elections as time passes and family interests evolve 
• A significant increase in liabilities to family trust distribution tax, many identified well past the due date for payment, resulting in sizable general interest charges. 

Reasons for making a Family Trust Election 

There are a number of reasons why a family trust election may be appropriate: 

• Trust losses - easier for a non-fixed trust with tax losses to satisfy the loss tests. 
• Company losses - a company with tax losses that is owned by a non-fixed trust may find it easier to satisfy the loss tests due to the tracing concessions. 
• Franking and imputation - where a non-fixed trust receives a franked dividend, in the absence of the family trust election, the trust may not satisfy the holding period rule. 
• Trustee beneficiary reporting - trusts that have made a family trust election are not required to report under the trustee beneficiary reporting rules. 
• Small business restructure rollover - small business entities can qualify for concessional restructure treatment under this rollover, with particular concessions for trusts that have made the family trust election. 

Why is Family Trust Distribution Tax now an issue? 

Family Trust Distribution Tax arises when the trustee of the family trust makes a distribution to an entity who is not a member of the family group. This can occur for a number of reasons: 

• A failure to understand that the trustee cannot confer a benefit on to any entity who is not a member of the family group 
• A failure to understand who and what comprises the relevant family group for the trust. The family group is defined according to who is selected as the specified individual, with the family group capturing individuals and entities related to that individual – the definition of family group needs to be revisited to ensure practitioners and taxpayers know who members of the family group are.
• This is further complicated where other business entities or individuals become members of the family group at a later time, especially where interposed entity elections are made 
• a failure to understand the implications of making interposed entity elections and the difficulty in conferring benefits upon non-family members via these entities 
• The needs of the family and the business change over time, and the family trust no longer achieves the needs of the family 
• A failure to understand what types of distributions can be subject to Family Trust Distribution Tax. 

In their recent update, the Tax Office reminded trustees and practitioners of the extended definition of distribution. They wrote: 

Latest guidance from the Tax Office 

The Family Trust Distribution Tax is a final tax imposed upon any individual or entity that receives a distribution from a family trust where the recipient is not a specified individual or a member of the family group. The tax is generally payable 21 days after the distribution is made (this may change in some circumstances). It is not necessary for the Tax Office to issue a Family Trust Distribution Tax Notice for an amount to be due. It is these unidentified liabilities that are the focus of this recent Tax Office release. 

Due to the nature of the tax, the Commissioner does not have discretion to waive a liability. While some provisions, such as Division 7A, allow the Commissioner discretion to waive a liability where the taxpayer made an honest mistake, there is no such scope in the Family Trust Distribution Tax. In addition, there is no time limitation on issuing notices of liability or the collection of the liability. 

The other focus of the Tax Office release is the General Interest Charge, which attaches to late payments of Family Trust Distribution Tax. They have stated that where an entity has taken reasonable steps to address outstanding and/or unidentified liabilities up to 31 December 2026, they may consider it fair and reasonable to remit the General Interest Charge as follows: 

• 80 per cent remission down to 20 per cent of the GIC liability remaining, where the entity has: 
  • Proactively self-reviewed their FTDT liability (before a review has commenced) 
  • Lodged the FTDT payment advice form, and 
  • Paid the FTDT. 
• Partial remission (less than 80 per cent), where the entity has: 
  • Made a voluntary disclosure of an FTDT liability during the early stages of a review (prior to an audit) 
  • Lodged the FTDT payment advice form and 
  • Paid the FTDT. 

The Tax Office has indicated that a remission would generally not occur where an audit has commenced, where they have issued a liability notice, or where there is evidence of mischief, tax avoidance, fraud or evasion. 

How BDO can help 

These issues can be complex. It is recommended you review all elections annually and that you are aware of who is in your family group when making distributions. If you require assistance with your family trust matters, consult with one of our corporate and international tax experts.