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Considerations Before Making a Family Trust Election
Stephen Harvey, current as of: 28 April 2016.
One of the decisions many practitioners face when setting up a trust is whether or not to make a family trust election (“FTE”). There are a number of considerations to work through in order to determine whether an FTE should be made and is of benefit to your clients.
What is an FTE?
An FTE makes the client’s trust a ‘family trust’ for taxation purposes, whereby distributions can only be made to eligible beneficiaries within a family group.
The election must specify the year of income from which it is to take effect, and nominate one individual whose family group is to be taken into account.
Generally the following people are considered part of the family group:
- the specified individual and their spouse;
- any parent, grandparent, brother or sister of the specified individual or their spouse;
- any nephew, niece or child of the specified individual or their spouse, including any lineal descendents; and
- the spouse of any individual mentioned above.
Companies, partnerships and trusts may also be members of the family group, provided that the family members listed above are entitled to all the capital and income of the relevant entity.
Why Planning is Important
Where a trust makes an FTE, distributions may only be made to eligible beneficiaries who are within the family group. Any distributions outside the family group will be subject to Family Trust Distributions Tax calculated at the highest marginal rate applying to individuals plus the Medicare levy.
This means that considerable planning needs to be carried out when making an FTE to ensure suitability over the long term.
Why make an FTE?
It may be worth considering making an FTE where:
- the trust receives franked dividends;
- the trust has losses;
- the trust owns shares in a company with losses; or
- the intention is to bring the trust within the family group of another trust.
Practitioners must consider:
(a) The trust loss measures
Without an FTE, a non-fixed trust will need to satisfy the complex trust tax rules (50% stake test, the pattern of distributions test, the control test, and the income injection test) in order to claim a tax loss or certain debt deductions. By becoming a ‘family trust’, the non-fixed trust is subject to concessional treatment, under which most of the trust loss tests do not apply.
(b) The company loss tracing measures
An FTE allows a non-fixed trust to access the family trust concession for the company loss recoupment rules.
(c) The franking credit trading measures
In general terms, a beneficiary with no fixed interest will not be a ‘qualified person’ for the purposes of the 45-day rule, unless the trustee of a non-fixed trust has elected to become a ‘family trust’. Only a ‘qualified person’ receives franking credits for dividends paid on shares, or interests in shares, acquired after 3pm on 31 December 1997 (except for the $5,000 small shareholder exemption).
(d) Trustee beneficiary reporting rules
Trusts that have made an FTE, or an interposed entity election, are excluded from having to comply with the trustee beneficiary reporting rules. An FTE is probably not recommended unless it is specifically required for one of the above reasons. One of the potential downsides is the possible prevention of the trustee from making distributions to certain persons/entities where effective tax planning would make it desirable.
Our Discretionary Trust checklist will provoke a number of questions in relation to FTEs as part of a regular review of your clients’ deeds.
Feel free to contact us on 1800 773 477 if you have any queries relating to an FTE.