The fact that your family trust has “Family Trust” in its name does not necessarily qualify it as a family trust for income tax purposes, as per the expertise of accountants in Sydney.
To be seen as a Family Trust by the ATO, the trust must make a Family Trust Election.
What is a Family Trust Election?
A Family Trust Election (FTE) is a choice by the trustee of the trust to specify a particular individual around whom the family group is formed. This individual is called the test individual. The family group is then restricted to a maximum group compared to all potential beneficiaries in the trust deed.
The family group is limited to the following:
- The tested individual and their spouse
- Any parent, grandparent, brother or sister of the test individual (or the test individual’s spouse)
- Any nephew, niece or child of the test individual or their spouse and any lineal descendent of these individuals
- The spouse of anyone mentioned above
- A company, trust or partnership where anyone mentioned above has an entitlement to all of the capital and income of the entity (or an appropriate FTE or interposed entity election has been made)
This is also subject to the above-mentioned being an eligible beneficiary in the trust deed.
Why should I make a Family Trust Election?
A trustee should consider making an FTE in the following circumstances:
- The trust receives franked dividends
- The trust has losses
- The trust owns shares in a company with losses
- To bring the trust within the family group of another trust, or
- Where the trust is involved in a restructure under the new small business restructure rollover relief
Where a trust receives franked dividends, the franking credits (the tax credits for tax paid by the company) can only be passed onto the beneficiaries if one of the following is satisfied:
- The shares were acquired pre-31 December 1997 or
- The beneficiary is an individual who does not receive more than $5,000 in franking credits from all sources during the year (the small shareholder exemption)
- where a trust has made an FTE.
For a trust to offset the prior year’s tax losses against future taxable income, the trust needs to be able to pass all of the following tests:
- The income injection test
- The control test
- The 50% state test and
- The pattern of distributions test
However, where an FTE has been made, the only test that needs to be satisfied is a modified income injection test (which is easier to satisfy than the standard income injection test)
For the company to offset the prior year’s tax losses against future taxable income, the company needs to be able to pass one of the following tests:
- The continuity of ownership test (COT) or
- The same business test (SBT)
To pass the COT, 50% or more of the shares in the company must be beneficially owned by the same people at all times during the test period (from the start of the loss year to the end of the income year).
Where the shares are owned by a trust, the company may not be able to pass the COT as it is very difficult to work out which individuals own which % of the shares.
However, where an FTE has been made, the trust is treated as an individual to assess whether the COT is passed.
To bring trust within the family group of another trust.
A trust with profits that have made an FTE can possibly distribute to another trust if it has also made an FTE choosing the same test individually.
Small business restructure roll-over relief
Beyond the scope of this article. If we have identified your trust as a candidate for restructuring, we will discuss FTEs with you.
If your trust receives franked dividends, has losses, or owns shares in a company with losses, the trustee should seriously consider whether it needs to make an FTE.
The FTE is made in the trust’s income tax return. Please discuss this with us before making any FTE.
Kreston Stanley Williamson Team
*Correct as of October 2017
*Disclaimer – this article has been produced by Kreston Stanley Williamson as a service to its clients and associates. The information contained in the article is of general comment only and is not intended to be advice on any particular matter. Before acting on any areas in this article, you must seek advice about your circumstances. Liability is limited by a scheme approved under professional standards legislation.