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However, this could overlook one current focus area of the ATO – whether or not Family Trust Distribution Tax (FTDT) is payable due to distributions having been made by Family Trusts outside their ‘family group’.
FTDT is applied at a flat 47 per cent on any distribution or payment made outside the designated family group. The Commissioner has no discretion to waive FTDT. More detailed information is contained in this recent article.
The issue might create complexity if certain tax elections have been made by existing entities in a family group: Family Trust Elections (FTE) and Interposed Entity Elections (IEE). While making these elections can unlock valuable tax concessions, they also bring strict compliance obligations including in the context of relationship marriage breakdowns, where large transfers of wealth and complex asset divisions are common.
The rigid wording of the tax provisions and the tight timeframes involved can create significant risk or severely limit the structuring options of either party if insufficient prior planning occurs.
Not getting this right may lead to:
| Issue | Potential impact |
|---|---|
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FTDT being payable if distributions are made to an entity controlled by a former spouse that is no longer within the family group or an entity which is unable to make a valid FTE.
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FTDT applying to some or all distributions from the family trust as part of the settlement. The Trustee of the family trust will then have to pay FTDT at the rate of 47 per cent of the affected distribution.
|
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Restricted ability to distribute assets from various entities within the group where suitable valid elections are not in place or where elections specify different individuals.
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The former spouse, or an entity fully owned by them, may practically be the only entities which can benefit from distributions from the family trust without FTDT applying. This might raise future concerns regarding both asset protection and tax efficiency. |
Example
Consider the situation of the parties to a former marriage or other relationship protected by law looking to make a property settlement. The parties are referred to below as Angelina and Brad and could represent any spouses or former spouses.
If a new trust is to be involved in a property settlement, FTDT must be considered as this can significantly reduce the size of the asset pool. This example highlights how timing is critical:
A key element for validity is that the ‘family control test’ needs to be met as at 30 June in the year for which the election is made. Formal dissolution of the relationship before this date will give rise to problems:
As the date of dissolution of the marriage is critical to the tax outcomes, the outcome would be different if Brad had established the new trust before 30 June 2025 and made a FTE specifying Angelina as the test individual in relation to the 2025 year.
This would appear to be a valid election as Brad was a member of Angelina’s family group as at 30 June 2025, meaning that Angelina could be specified as the test individual in relation to any trust that the Brad controlled as at that date.
Although it is not usually possible to predict in advance how property settlements will be resolved, parties should consider the control mechanisms of new entities established, including perhaps incorporating any anticipated new entities (e.g. trusts and companies to be owned by trusts) in the prior financial year if:
If you’d like help planning to avoid exposure to Family Trust Distribution Tax, please contact your Grant Thornton contact Partner to discuss this further.
