Issues with family trust distribution tax on the rise, ATO warns

The ATO has issued new guidance to trustees of family trusts who have made a family trust election on how to limit their exposure to family trust distributions tax in the lead up to 30 June.

In a recent update, the Tax Office warned trustees and advisers that it was seeing an increase in family trust distribution tax issues due to “inadequate record keeping, succession planning, intergenerational expansion of businesses and evolving private groups”.

“When considering trustee resolutions in the lead up to 30 June, it’s important for trustees of family trusts who have made a family trust election (FTE), or entities with an interposed entity election (IEEs), to review their FTEs and IEEs, and understand who is in their family group,” the ATO said.

The ATO said this is critical for reducing the risk of any family trust distribution tax liabilities arising.

Once a valid FTE or IEE is made, the ATO said it’s important that trustees are mindful of who the specified individual is for each election.

“This is because there is a strict legal definition of family group, and it’s based on who the members of the specified individual’s family group are,” the Tax Office said.

“Often in private groups, there may be multiple family trusts with different specified individuals which means there will be differences in who is in the family groups.”

The ATO said in some cases, there may have also been an expansion of the business with new entities or changes in family members, such as where there has been a divorce.

“While the election is in effect, family trust distributions tax will apply if any distributions are made outside the family group.”

“Family trust distributions tax is a 47 per cent tax, payable by a trustee, director, or partner.”

The ATO said that to avoid triggering family trust distributions tax, trustees should maintain strong governance and record-keeping practices, understand what FTE or IEE elections an entity or group has in place, and identify the members of the specified individual’s family group before making distributions.

“Trustees should review this information on an annual basis and keep these elections front of mind when administering their tax affairs,” it said.

The ATO warned trustees that the Commissioner has no discretion to ignore the application of family trust distributions tax and cannot limit the period it applies.

The Tax Office also has no power to extend the time to revoke or vary elections.

“If you've not made an FTE or IEE before, or are considering making one at the end of the financial year, it’s important to consider both the current and future impacts of making the election,” it said.

“While the concessions from making elections can be advantageous, there can be future limitations, constraints and potentially significant financial impacts for the private group for generations to come.”

The ATO advised any trustees who are unsure about any matters related to FTE or IEEs to speak to their registered tax agent.