Recent ATO Activity in Trusts and Family Trust Elections

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There continues to be a focus by the ATO on trusts and, in particular, family trust elections.

You may remember that there has been increasing scrutiny in the last 2 years on Trusts, through their updated focus on Section 100A of the Tax Act and ensuring that beneficiaries are actually benefiting from the distributions being made to them by Family Trusts. As part of the ATO’s continuing review of the way trusts are used by taxpayers, they have now ramped up their attention on distributions to ensure they are being made to eligible beneficiaries under a trust’s Family Trust Election (FTE).

To give you some context, FTE’s are an irrevocable election whereby you specify a “test individual” around which distributions are based and it then limits these distributions to the “family group” of this test individual. The election basically limits the people that can receive distributions from the trust to the test individual, their spouse and children, various other family members (ie parents, grandparents, siblings, nephews, nieces and other lineal descendants of the test individual), spouses of these people and related entities such as companies and trusts controlled by family members.

The main reasons a trust would make a FTE are to ensure the trust can carry forward tax losses into the future, and also to allow beneficiaries to utilise franking credits by allowing them to be passed through to the beneficiary from the trust. Without a FTE, losses would not be able to be carried forward and used in the future, and franking credits would be lost.

The areas of concern for the ATO, and this has been evident in recent high net wealth family group reviews, are as follows:

  • FTE’s are not being done when they should be or not being done in a way that is not valid, documented properly or in a timely manner.
  • Distributions being made to beneficiaries not within the Family Group (thus opening the trust up to Family Trust Distribution Tax – FTDT of 47% in the Trust’s hands). This can happen when distributions are filtered through multiple entities and end up in an individual or entity’s hands who is outside the Family Group.
  • Interposed Entity Elections (IEE), which are complex further elections required to allow distributions to entities outside the defined family group, not being done when required.

There is a broader concern in the ATO that trusts are being used for tax minimisation purposes. With this in mind, and as confirmed with the recent activity in relation to Section 100A, taxpayers should review their structures (in conjunction with their advisors) and ensure that any potential issues with their trusts are identified and addressed before there is any review or audit activity from the ATO. With ample data matching available to the ATO in this area, if you have got it wrong, it is only a matter of time until the ATO picks it up.

If you have any concerns in relation to your trusts, please don’t hesitate to contact your client manager at KSW.

AUTHOR – Michael Goodrick

Correct as of 29 January 2025

*Disclaimer – Kreston Stanley Williamson has produced this article to serve 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.

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