Managing family trust elections
Many practitioners would be aware that family trust elections can be an effective tool when used correctly. Some of key reasons for making a family trust election include:
Making it simpler to pass the trust loss tests by ensuring the trust needs to pass only a modified version of the income injection test;
Helping a company with losses to pass the continuity of ownership test if its shares are held by a discretionary trust; and
Ensuring beneficiaries of a discretionary trust have better access to franking credits from franked dividends received by the trust by allowing them to be treated as a ‘qualified person’ for the purposes of the 45-day holding period rule.
However, there are some disadvantages to making family trust elections that need to be considered.
When a trust makes a family trust election, the family group is determined by reference to the individual specified in that family trust election. Any distributions made outside the family group of the specified individual are subject to family trust distribution tax. This tax is payable at the top personal marginal rate plus Medicare levy.
This is why the ATO is reminding practitioners and trustees that family trust elections (and interposed entity elections) should be kept on file and be considered carefully, especially when making distribution decisions.
For trusts that have already made an election, the ATO is also encouraging clients to consider if it is actually required, or whether the specified individual is the most suitable.
If not, consideration should be given to whether it is possible to revoke the election or vary the specified individual. Practitioners and trustees still need to approach this carefully because there are timing restrictions as well as other strict conditions that need to be met.
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