Family Trust Election

Please note a valid FTE requires the trustee to satisfy the relevant tests and make an election in writing in the approved form. Once a family trust election is made, you cannot revoke.

What are the advantageous for Family Discretionary Trusts (FDTs) to lodge a Sch 2F of the ITAA 1936 family trust election (a FTE)?

1. The trust loss measures – Broadly a trust (other than an excepted trust) will be denied a deduction for prior year losses and debt deductions if it fails to satisfy the relevant tests. For example for a non-fixed trust, it needs to satisfy a 50% stake test, a pattern of distributions test, control test and income injection test. If you make a FTE, there is only one test that needs to be passed to utilise the losses in the trust, that is the income injection test, and only in a modified way.

 The only situation where you fail the income injection test if both of the following applies:

  • Where there is a scheme, trust losses and deductions are used to shelter assessable income from tax.
  •  And the economic benefit of such a scheme must flow to an "outsider to the trust". Outsider includes person, including trusts, but not trust that has made a FTE with the same significant individual that have lodged a FTE, or an interposed entity election, outside of the family group.

2. A company loss tracing concession - The company loss provisions allow a company that has a non-fixed trust as a shareholder to benefit from a tracing concession where that non-fixed trust is a family trust. Broadly, the tracing concession applies so that where the relevant interests in a company are held by the trustee of a family trust, a single notional entity that is a person will be taken to own the interests. This means that there is no need to trace past the family trust.

 Example:  Co X makes a tax loss in 2018. The shareholders of Co X are:

  • Y owning 40% and
  • the Y Trust, a non-fixed trust which is a discretionary trust, owning 60%.

In 2019 Co X stops carrying on its loss-making business and starts a new business bringing in a new shareholder Z so that the shareholders are Y owning 20%, Y Trust owning 40% and Z owning 40% of the shares in Co X.

After 2019 Co X thus no longer passes the similar business test (SBT) for carrying forward company losses.

In 2022 Co X makes a profit and seeks to offset the profit against the 2018 tax loss. Co X can’t do so because, as is, Co X fails the continuity of ownership (COT) test.

The continuity of ownership test requires that shares carrying more than 50 per cent of the voting, dividend and capital rights be beneficially owned by the same persons at all times during the ownership test period between incurring the loss and when the loss is to be offset against later income.

Y Trust in 2022 is not treated as the same ownership as Y Trust in 2018 where Y Trust is a non-fixed trust so Y Trust 40% continuing ownership can’t be added to Y’s 20% ownership to meet the at least 50% requirement to satisfy the COT and offset the company tax loss.

If Y Trust meets the requirements for lodging a FTE, including satisfying the family control test, the Y Trust can elect to be a 2FFT from 2018. Then Y Trust’s 40% continuing ownership can count so the Co X can pass the COT apply the 2018 loss against 2022 taxable income.

3. The holding period rules regulating access to franking credits – FTE is almost essential where the trust derived franked dividend with franking credit attached. Because without making a family trust election, a FDT will always be taken to have a negative delta/short position on shares because of the discretion to select beneficiaries under a FDT that will take dividends. The holding period rules allow the trustee and beneficiaries of a family trust that receives a franked dividend or franked non-share dividend to benefit from a franking credit concession without having to satisfy the 45 days holding period.

That being said even if no FTE is made there are exceptions apply where a beneficiary of a FDT is not required to satisfy the holding period rules. For example: Where the beneficiary is an individual and they receive in total no more than $5,000 in franking credits from all sources. This is known as the “small shareholder exemption”, this exemption also applies where the shares were acquired prior to 1 July 1997.

4. Trustee Beneficiary Reporting (TBR) rules. The trustee beneficiary reporting rules impose responsibility in trust for downstream distributions from trust through other trusts. Trusts that have made a FTE or an interposed entity election (IEE) (among others) are excluded from having to comply with the TBR rules.

5. Small business restructure rollover from first July 2016 - FTE is absolutely essential where the small business restructure roll-over provision is being utilised. On 1 July 2016 small business entities can restructure their business by moving active assets into, or out of, a trust, company, partnership, or a combination, without adverse capital gains tax consequences. There are requirements that must be met in order to access the rollover. One of these is that there is no material change in the ultimate economic ownership of an asset. Special rules apply in this context to discretionary trust

Disclaimer: The material and contents provided in this blog are general guide and informative in nature only. They are not intended to be seen as legal and tax advice. If expert assistance is required, you should seek your own advice for any legal, tax or investment issues raised in your affairs.