Question
Should a trust make a family trust election (FTE)?
Tax Tip
Only if absolutely necessary and noting an FTE can be backdated.
Reasoning
An FTE does not mandate that trust distributions must be made within the family group.
But, where an FTE is made, it may be wise to make trust distributions within the family group otherwise the trust is subject to family trust distribution tax (FTDT) at the top marginal tax rate plus medicare levy. The beneficiary is not taxed on the distribution so long as the trust pays the FTDT (see section 271-105(2) of Schedule 2F ITAA 1936).
If FTDT is triggered, it will defeat any tax planning opportunities in using a corporate beneficiary to limit tax to the corporate tax rate as the trust is subject to the highest tax rate.
The FTE family group is not a wide class of beneficiaries as what is generally described in a discretionary trust deed (see section 272-95 of Schedule 2F ITAA 1936).
The most distinct limitation of an FTE family group is that Aunties and Uncles of the test individual are excluded from the family group and this then extends to their children (being cousins of the test individual) as also excluded. See diagram below.
Your client may not envisage distributing to their Aunties, Uncles and cousins. However, by making an FTE, where it is unnecessary, this may prevent them from distributing to those parties.
Another negative implication is where FTDT is triggered on franked dividends received by the trust. The franking credits attached to those dividends are lost, that is, they cannot be claimed by the beneficiary that those dividends flowed to (see ATO ID 2004/859).
This may not currently be applicable to your client however, by making an FTE, where it is unnecessary, this will potentially put this risk onto your client.
Therefore, only make an FTE where it is absolutely necessary.
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