Family trust elections, the family group and FTDT

A family trust election (FTE) is a choice a trustee makes, in writing on the approved form, to have a trust treated as a family trust for tax purposes. Calling a trust a family trust in its deed does not make it one. An interposed entity election (IEE) lets a trust, partnership or company join the family group of the individual named in an FTE.

The elections bring real benefits, and one real cost. Once an election is in force, any distribution to someone outside the family group is taxed at 47% in the hands of the trustee. The ATO cannot waive it. This guide covers why trustees elect, who is inside the family group, how family trust distribution tax (FTDT) works, and the limited ways to vary or revoke an election. Facts are as at 18 October 2026. Section references are to Schedule 2F to the Income Tax Assessment Act 1936.

Why trustees make a family trust election

The ATO lists five reasons.

An entity makes an IEE so that distributions to it are not subject to FTDT, and to be excluded from trustee beneficiary reporting.

TFN withholding

Trustees of closely held trusts generally withhold from distributions to beneficiaries who have not quoted a TFN, at the top rate of tax. The ATO says withholding is not required where the payment or entitlement is subject to FTDT, that is, where the trust is a family trust and the beneficiary is outside the family group. The FTDT regime takes over in that case.

Bucket companies

A trust that distributes to a corporate beneficiary needs that company inside the family group, otherwise the distribution attracts FTDT. The usual way in is an IEE by the company. The ATO's own example is a bucket company with non-family shareholders that received distributions from a family trust and generated FTDT. If a company later sells even a small parcel of shares to an outsider, distributions it receives or makes can fall outside the group, and an IEE cannot simply be revoked to fix it.

The test individual

Each FTE names one individual. The ATO calls this person the specified individual, also known as the primary or test individual. The person must be alive at some point between the time the election takes effect and the day it is made, so a deceased or unborn person cannot be named. The election gives that person no extra rights or duties. If they die, they remain the specified individual and the election continues.

Who is in the family group

The family group is wider than the family. It is worth separating the two.

Family means the specified individual and their:

• parents, grandparents, brothers and sisters (of the specified individual or of their spouse)
• nephews, nieces and children (of the specified individual or of their spouse)
• lineal descendants of those nephews, nieces and children
• spouse, and the spouse of anyone listed above

Aunts, uncles and cousins are not family.

The family group includes the family, plus:

• former family members, such as former spouses, widows, widowers and stepchildren
• the trust that made the FTE
• other family trusts with the same specified individual
• entities that have made an IEE into this family group
• companies, partnerships and trusts in which the specified individual, members of their family and family trusts with the same specified individual hold all the fixed entitlements to income and capital (s 272-90(5))
• deductible gift recipients and tax-exempt bodies

Non-fixed trusts that name a different individual are not in the group. A deceased estate generally does not join the group.

The family control test

To make an FTE, a trust must pass the family control test. For a trust, that means control by the specified individual, family members and/or a professional legal or financial adviser acting in that capacity. A company or partnership making an IEE must be held, as to fixed entitlements to more than 50% of income or capital, by the specified individual, family members and nominating family trusts.

Is this person in the family group?

Run this before every distribution resolution, and before any loan, debt forgiveness or asset transfer from the trust.

Family trust distribution tax

FTDT applies (ss 271-15 and 271-20) when a family trust, or an entity with an IEE, makes a distribution or confers a present entitlement to income or capital on someone outside the family group, after the election takes effect. Because an election can take effect from an earlier year, FTDT can bite on distributions made before the election was signed.

The ATO treats distribution broadly. It includes loans, transfers of property, forgiving a debt, and transactions where the trust gives more than it receives. Reasonable salary and employment benefits are excluded. The ATO's examples include an interest-free loan to a non-family member that was treated as a distribution and generated FTDT.

Worked example

The Lee Family Trust has an FTE naming Grace Lee, effective from 2015-16. In 2025-26 the trustee resolves to distribute $30,000 to Grace's cousin Daniel to help with a house deposit. Cousins are not family, and Daniel has no IEE route. FTDT is $30,000 x 47% = $14,100, payable by the trustee within 21 days of the distribution with an NAT 6175 payment advice. If it is not paid within 60 days of the due date, GIC starts to accrue.

The same result would follow if the trustee had instead lent Daniel $30,000 interest-free. The ATO treats that loan as a distribution.

Six situations where FTDT catches families out

The ATO's family trusts page works through these cases. Each one is a distribution that looked routine at the time.

The common thread is that the family group is fixed by reference to one person, while the entities around the trust keep changing. Shares get sold, new trusts get set up, people marry, divorce and die. A group chart that was right when the election was made can be wrong three years later. Updating the chart each year, before the June resolutions, catches most of these.

Death of the specified individual

The election continues after the specified individual dies, and so does the family group defined by reference to them. The ATO notes that a deceased estate generally does not join the family group. That makes estate planning worth a look while everyone is well: which entities will receive distributions after a death, and whether each has the elections it needs. A retrospective FTE was not possible in the ATO's example, so the planning has to come first.

Making an election

The FTE rules are in s 272-80 and the IEE rules in s 272-85. An election is made in writing in the approved form.

• An FTE is made for a specified income year that has already ended. The trust must pass the family control test at the end of that year.
• It can specify an earlier income year if the family control test was passed from the start of that year to 30 June before the election, and all distributions in that period went only to the specified individual or their family group.
• It starts from the beginning of the specified year, or later if the test was not passed for the whole year.
• The ATO says FTEs can be made for 2005 and later income years. A trust can have only one FTE (s 272-80(11)).
• FTE information goes on the trust return every year the election is in force.

An IEE is made to be in the family group at all times after a specified day in a specified income year. An entity can make more than one IEE if each relates to a trust with the same specified individual. An IEE can join a different individual's family group, but the ATO notes this narrows the group to members common to both. An IEE cannot be varied.

Timing example

A discretionary trust has distributed only to Ahmed Khan, his wife and their adult children since 2019-20, and Ahmed has controlled the trustee company throughout. In September 2026 the trustee makes an FTE specifying 2019-20 with Ahmed as the specified individual. Because the family control test was met and all distributions stayed inside the group from 1 July 2019, the earlier year can be specified. If one distribution in that period had gone to Ahmed's cousin, that earlier year would not be available, and the earlier distribution would sit outside the election.

Varying an election

The specified individual can be changed once, and only in limited circumstances.

• The new individual must have been a member of the original individual's family when the election commenced.
• There must have been no distributions outside the new individual's family group during the election period. A family law order can also allow a variation.
• The specified income year cannot be varied.
• A variation under the family member rule is made through the FTE variation schedule with the trust return, for an income year no later than the fourth income year after the specified year (s 272-80(5A), (5B) and (6B)). It cannot be backdated.
• A variation following a family law order, agreement or award that gives the new individual and their family control of the trust is a separate rule (s 272-80(5C)). It is not limited to the four-year window.

Revoking an election

An FTE can be revoked in two cases. The death of the specified individual does not revoke it.

• Fixed trusts (s 272-80(6)). A fixed trust wholly owned by the family group at the start of the specified year can revoke once someone outside the group later holds a fixed entitlement. The revocation goes in the return for the year that happens. This case is not limited to the four-year window.
• Election not needed (s 272-80(6A)). Any trust can revoke if the election was not relied on for losses, bad debt deductions or franked distributions. The revocation must be for an income year no later than the fourth income year after the specified year (s 272-80(6B)), and is made through the FTE revocation schedule. It cannot be backdated.
• A lodged return cannot be amended to add a revocation schedule.
• If no return is required, the form is due within two months after the end of the year, or a later date the Commissioner allows.
• A trust that has revoked an FTE cannot make a new one.

An IEE can be revoked in limited cases, such as where the entity is, or later becomes, a family group member through fixed entitlements. An IEE is revoked automatically if the related FTE is revoked.

The ATO's current focus

The ATO's family trusts page sets out its expectations plainly. Review elections at least annually, confirm the family group before making distributions, and keep written election records until generally five years after the trust or entity stops lodging returns. Its worked examples focus on the cases that cause FTDT in practice: fixed trusts with an unrelated unitholder, companies that sell shares to an outsider, bucket companies with non-family shareholders, succession plans that move wealth to trusts without an election, distributions after the specified individual dies, and interest-free loans.

GIC remission offer, until 31 December 2026

The ATO says that until 31 December 2026 it may consider remitting 80% of the GIC on FTDT (leaving 20%) where the trustee proactively self-reviews, lodges the NAT 6175 payment advice and pays the FTDT. Partial remission may be available for a voluntary disclosure made early in a review. Remission is generally not considered fair and reasonable once a risk review has moved to audit, an FTDT notice has issued, or there is evidence of avoidance or fraud. GIC on FTDT incurred from 1 July 2025 is not deductible.

For firms, the practical step before the end of 2026 is a file review of every trust with an FTE or IEE: the specified individual, every recipient of a distribution or loan in the past few years, and any change in company shareholdings.

For the resolution side, see the trust distribution checklist. For engagement scope across a family group, see the family group engagement letter template.