Family Trust Elections – Are your clients’ trust distributions within their family group?

With 30 June fast approaching, it is time to start considering trustee distribution resolutions. For those many trusts that have made a family trust election (FTE), getting trust distributions wrong can have major implications.

Where a trust has made an FTE, there are a number of issues to consider including:

• What counts as a ‘distribution’?
• Who is part of the ‘family group’?
• Does your trust deed save you?

What are the consequences?

If a distribution is made outside the family group, then family trust distribution tax (which is calculated at the highest margin tax rate plus Medicare) becomes payable 60 days after the distribution is made and interest will commence accruing at that point.

Family trust distribution tax is a debt that is not subject to any limitation periods and, worse still, the trustee (and all of the directors of the trustee at the time of the distribution) are jointly and severally liable to pay the family trust distribution tax. That is, the problem does not go away. The same applies to entities (including companies) that have made an interposed entity election (IEE) and distribute outside of the ‘family group’.

Although the rules around the FTE and IEE provisions have been around for some time, they continue to cause issues for advisers and their clients and our recent experience is that the ATO is looking at trust resolutions and FTEs during reviews.

What should you do?

Before preparing the trustee resolutions for clients, it will be important to check to see whether the trustee has made an FTE or IEE.

For those trusts that have FTEs and IEEs, it will be important to ensure that the trustee does not resolve to distribute income or capital to individuals or entities outside the ‘family group’.

Also it is prudent to include terms in the trust deed that prohibit distributions of income and capital to individuals and entities outside of the family group for those trusts that have made an FTE or IEE.

Linda Tapiolas will be discussing FTEs and IEEs using examples to assist in determining who is in the ‘family group’ and what are the potential adverse consequences of making distributions outside the ‘family group’ in our upcoming webinar on 27 May 2020. If you would like to register, please click here.

If you would like to discuss an issue on FTEs and IEEs or would like to have your client’s trust deed reviewed to check whether it deals with restricting income and capital distributions outside the ‘family group’, please contact a member of our tax team.