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Family Trust Election (FTE) and Its Implications for Discretionary Trust Shareholders - Danger!
















Introduction

When dealing with clients who have companies with shareholders being discretionary trusts, it's essential to understand the implications of lodging a Family Trust Election (FTE). This decision can significantly impact the taxation and compliance requirements of the trusts and their beneficiaries.

Family Trust Election (FTE)

A Family Trust Election is a declaration made by a trust, designating it as a family trust for taxation purposes. This election allows the trust to access certain tax concessions and simplifies the application of specific tax laws.

Benefits of Lodging a Family Trust Election

  1. Access to Tax Concessions:

  • Franking Credits: Ensures that franking credits can flow through to beneficiaries without being lost.

  • Losses and Deductions: Allows the trust to carry forward and use tax losses and bad debt deductions, provided certain conditions are met.

  1. Simplified Compliance:

  • Family Trust Distribution Tax (FTDT): By making a family trust election, the trust avoids FTDT on distributions to beneficiaries within the family group.

  • Avoiding Penalties: Helps in avoiding penalties associated with distributions to entities outside the family group without the election.

  1. Clarity and Certainty:

  • Defined Beneficiary Group: Provides clear guidelines on who can receive distributions without attracting additional tax liabilities.

Problems with Not Lodging a Family Trust Election

  1. Loss of Tax Benefits:

  • Franking Credits: Risk of losing franking credits on dividends distributed to the trust.

  • Tax Losses: Inability to utilise carry-forward tax losses and bad debt deductions effectively.

  1. Increased Tax Liabilities:

  • FTDT: Distributions to non-family members attract Family Trust Distribution Tax at 47%.

  1. Compliance and Complexity:

  • Additional Reporting: More complex tax reporting and compliance requirements without the election.

  • Uncertainty: Increased uncertainty around the tax treatment of distributions.

Backdating the Family Trust Election

The ATO does not generally allow for the backdating of a Family Trust Election. The election is effective from the beginning of the financial year in which it is made or a future financial year. Retrospective elections are not permitted. Therefore, the timing of lodging the FTE is crucial.

Steps to Lodge a Family Trust Election

  1. Determine Eligibility:

  • Ensure that the trust meets the definition of a family trust.

  • Identify the test individual (a family member whose family group will be defined for the trust).

  1. Complete the FTE Form:

  • Download and complete the Family Trust Election form (NAT 2787) from the ATO website.

  • Provide details of the trust, test individual, and effective date.

  1. Lodge with the ATO:

  • Submit the completed form to the ATO either online or by mail.

  1. Maintain Records:

  • Keep detailed records of the election and any related correspondence for compliance purposes.

Practical Advice for Accountants

  • Evaluate the Need: Assess the trust's financial situation and future plans to determine the necessity and benefits of lodging an FTE.

  • Consider Timing: Plan the election to coincide with the start of a financial year to maximize benefits.

  • Consult Professionals: Engage with tax professionals to ensure compliance and optimize tax outcomes.

Conclusion

Lodging a Family Trust Election can provide significant tax benefits and simplify compliance for trusts with companies as shareholders. However, it must be done prospectively and with careful planning. Not making the election can lead to increased tax liabilities and complexity. Therefore, clients should be advised to consider their specific circumstances and seek professional guidance to make an informed decision.


If you need further help please consult Abbott and Mourly Lawyers - nush@abbottmourly.com.au

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