By Alex Whitney and Annika Lawrie -
Snapshot
- The Australian Taxation Office is targeting family trusts, with increased audit activity and more assertive compliance positions.
- Early identification of family trust election and family trust distribution tax risks is critical, as an overlooked election or an incorrectly chosen test individual can trigger significant and unexpected liabilities.
- Where pre-CGT assets are held in trust structures, even changes or transactions that appear benign should be approached with caution, as timely advice may avert severe adverse tax outcomes.
The Australian Taxation Office (‘ATO’) has made its message clear: family trusts are now a major focus area of its audit and compliance activity. This focus has been accompanied by an increasingly assertive approach, with the ATO scrutinising matters that have not historically attracted much attention and, in some cases, applying positions that have not previously been articulated in public guidance. This article highlights some recent examples illustrating these trends and implications.
An increasingly common area of dispute is the family trust election (‘FTE’) regime which, amongst other things, allows family trusts to pass on franking credits on franked dividends. Coupled with the FTE regime is the punitive family trust distribution tax (‘FTDT’), which has also seen recent action from the ATO announcing a partial amnesty.
For FTEs and FTDT, the key concept is the ‘test individual’ – this is the person that forms the nucleus of the family group for FTE and FTDT purposes.
Invalid duplicate election causing a $13.2m FTDT bill
There is an ongoing matter being reported on publicly where the granddaughter of the family’s patriarch was appointed as the test individual for two family trusts. However, according to Federal Court documents, the advisors of the family group purportedly did not realise that the grandfather (the family’s patriarch) had previously been made a test individual for one of the trusts. It can sometimes be very difficult to establish with certainty whether an FTE was made in the past (especially where new advisors have taken over a client) in part due to the ATO not retaining a copy of the election itself.
This inadvertent duplicate FTE meant that the later (duplicate) FTE nominating the granddaughter was invalid, and the distributions that relied on that FTE were made outside the family group. This apparent error led to the FTDT in the order of $13.2 million.
This matter is set to be heard in late May 2026 and its progress is being closely watched.
FTDT General Interest Charge amnesty
FTDT automatically applies when a distribution is made by a family trust (i.e., a trust with an FTE) outside of the relevant family group. There is no limitation period on FTDT general interest charge (‘GIC’), which can accrue for years while the FTDT liability goes unnoticed.
To encourage taxpayers to voluntarily disclose FTDT issues, the ATO is offering an amnesty period until 31 December 2026, in which an 80 per cent remission of GIC liability can be approved where a taxpayer has:
- proactively self-reviewed their FTDT liability (before a review has commenced);
- lodged the family trust distribution tax payment advice form (NAT 6175); and
- paid the FTDT.
