Another tax consideration – Family Trust Distribution Tax

The Australian Tax system is difficult to understand at the best of times; however, it is prudent as a trustee of a trust to ensure you have reviewed the trust deed and trust law to confirm if elections such as Family Trust Elections (FTE) are necessary.
When an FTE is in place, it is then important to understand the implications imposed on distributions that are made outside the family group.

What is an FTE you ask?

An FTE is an election made by a trustee of a trust which changes the way a trust interacts with trust losses, bad debts and franking credits.

An FTE essentially turns a ‘discretionary trust’, with a broad range of beneficiaries, into a ‘discretionary trust’ with a smaller defined group of beneficiaries, limited to the family group of the test individual chosen. This essentially fixes a group of beneficiaries to whom can receive distributions from the trust.

The test individual must be a living individual, this individual becomes the center of the distribution group, to which two generations above form part of the family group (or a family trust family distribution tree if you wish), and lineal generations below.

Broadly, the family group includes the:

• Test individual and their spouse,
• Parents, grandparents, brothers and sisters, of the test individual and their spouse,
• Nieces, nephews and children of the test individual and their spouse, and any lineal generations of these individuals.
• The family group also includes spouses of anyone mentioned above.

It must be mentioned that even if a family member falls within the family group, for FTE purposes, a trust is governed by the trust deed, and therefore, a beneficiary must be an eligible beneficiary under the terms of the trust deed.
Further, entities such as companies and trusts can also become a part of the family group, when:

• they are beneficiaries under the trust deed, or,
• where an individual beneficiary family member has an entitlement of income or capital of an entity, or,
• where the trust has a direct interest in another entity, or
• an appropriate FTE or Interposed Entity Election (IEE) is made.

Why would you want an FTE?

Good question!

Did you know if you do not have an FTE in place the trust must satisfy a certain range of tests, annually, to:

• carry forward trust losses,
• utilise bad debt deductions, and,
• the trustee has restrictions imposed which limits the distribution of franking credits.

Simply, an FTE significantly simplifies the trusts’ ability to use carry forward trust losses, distribute franked dividends and allows a more seamless utilisation of bad debt deductions. 

So, what’s this FTDT stuff?

So, you set up an FTE to streamline trust operations, and then you decide to distribute income of the trust to your long-lost cousin, or to an entity that is not deemed to be a part of your family group.

This is where the ATO will issue you a FTDT notice, which is calculated to be 47% of the “offending distribution” (currently the top marginal tax rate plus Medicare Levy – ouch).

The trustee is liable to pay this FTDT.

This, of course, is not an ideal situation for the trustee to be in.

Planning is key

Now you know, the good, the bad, the ugly.

Planning is key.

Ensure you understand how your trust operates, who the beneficiaries are and if an FTE is in place what group of beneficiaries’ is the trustee restricted to distributing to (a structure diagram is always helpful).

When it comes to trusts’, you must always remember to: read the deed, read the deed, read the deed.

Again, planning and understanding are key.

With 30 June 2026 approaching quickly, please review your trustee obligations and schedule time with your Johnsons MME advisors to cover trust compliance matters.

FAQs about Family Trust Distribution Tax

1. What is Family Trust Distribution Tax?

Family Trust Distribution Tax is a penalty tax applied when a trust with a Family Trust Election distributes income outside its defined family group. It is currently 47 percent, including Medicare levy.

2. When does Family Trust Distribution Tax apply?

It applies when a trustee distributes income or capital to a person or entity that is not part of the nominated family group under the Family Trust Election.

3. What should trustees consider to remain compliant with Family Trust Distribution Tax rules?

Trustees should understand the trust deed, confirm who is within the defined family group, and ensure distributions align with both the deed and the Family Trust Election. Reviewing structures and seeking appropriate advice before making distributions is critical.