Family Trust Election

How it works

The family trust election requires a living individual to be nominated as the ‘test individual’, also known as a ‘specified individual’ or ‘primary individual’. The election must be made in writing and in an approved form. The ambit of the family group is defined by reference to the test individual. The test individual must be living at the time of election, but the subsequent death of that individual will not upset the standing of the election.

The trust is permitted to distribute income or capital of the trust to persons within the family group (see heading below regarding definition of family group). However, it is first necessary to determine that the trust is eligible to make a family trust election by having satisfied the family control test.

Eligibility – the Family Control Test

1. The test individual and / or any members of the family group; or
2. Any of the above persons and an expert adviser to the family; or
3. The trustee of one or more family trusts. This is provided that the test individual is the same person in respect of both trusts and the family group has greater than a 50% stake in the income or capital of the trust.

What does ‘control’ mean?

Broadly, the group will be taken to control the trust if either of the following powers exists:

• The group has power to obtain the benefit (including indirectly, if relevant) of the income or capital of the trust; or
• The group has power to control (including indirectly, if relevant) the distribution of income or capital of the trust; or
• The trustee generally acts in accordance with the directions or wishes of the group; or
• The group has power to remove or appoint the trustee; or
• The group has greater than a 50% stake in the income or capital of the trust; or
• Persons in the group are the only persons who can benefit from the income and capital of the trust.

Note that some of these above control tests will not be satisfied where the relevant power is being exercised by an expert adviser described in point 2 above.

The family group

The ‘family group’ consists of the following:

Individuals that can be included in the family group:

• The test individual, their child, parent, grandparent, brother, sister, nephew, niece. Note that a ‘child’ includes an adopted child, stepchild, ex-nuptial child, child of a spouse, or child within the meaning of the Family Law Act.
• The spouse of any of these above-listed persons. This includes an ex-spouse and an individual with whom the individual is in a relationship and lives with on a genuine domestic basis.
• The lineal descendants of a nephew, niece or child of the test individual or the test individual’s spouse. Note that lineal descendants is defined to include adopted children, step-children or ex-nuptial child.
• An individual who was a spouse of the test individual or the spouse of a family member before a relationship breakdown in a marriage or relationship.
• An individual who was member of the family group immediately before the death of the test individual or another family member and who becomes the spouse of a person who is not a member of the family group.
• An individual who was a child of the spouse of the test individual or group family member before a breakdown of the marriage or relationship.

Entities that can be included in the family group:

• The family trust itself.
• An alternative trust with the same test individual specified in its family trust election.
• A company, trust or partnership which has made a valid interposed entity election to be a part of the family group.
• A company, trust or partnership whereby members of the family group (and / or their relevant family trusts) have fixed entitlements to all of the income and capital of that entity.
• Certain interests in small enterprises, certain funds and certain tax-exempt bodies.

Note that the above-listed persons do not cease being part of the family group merely because of the death of the test individual or another family member.

Applying retrospectively

• the trust satisfied the family control test; and
• only the test individual or members of the family group have been made presently entitled to capital or income from the trust or received distributions of capital or income.

Revoking

The family trust election may not be revoked other than in limited circumstances. Specifically, revocation is permitted where within 4 years after the income year specified in the original family trust election:

• The trust which has the election in place is a fixed trust; or
• Concessions available under the election have not been utilised by the trust.
  For example, tax losses must not have not been recouped by the trust or another entity where those losses could not have been recouped without an election in place. Similarly, bad debt deductions or franking credits must not have been claimed if the claim was only available because an election was in place.

Once revoked, the trust is not permitted to have a further family trust election instituted.

Varying

The test individual may be varied on only one occasion within 4 years after the income year specified in the original family trust election. This is provided that:

• The new test individual was a member of the original test individual’s family group when the election commenced; and
• Since the election commenced, no person outside of the new test individual’s family group has been made presently entitled to capital or income of the trust or received distributions of capital or income.

The test individual may also be varied pursuant to family court orders where there is a marriage breakdown.

Interposed entity election

The members of the family group include those natural persons who are family members of the test individual. However, it is possible for a company, trust or partnership to make an interposed entity election to also be included in the family group. This election must be made in writing and in an approved form.

Note that an interposed entity election is not necessarily required where members of the test individual’s family have fixed entitlements to all of capital and income of the entity. In such circumstances, the entity will automatically be a member of the family group.

For an entity to be eligible to make an interposed entity election, the interposed entity must itself pass a modified version of the family control test at the end of the income year of the proposed commencement of the election. To pass the modified test, the controlling group must beneficially hold (including indirectly, if relevant) fixed entitlements to greater than 50% of the capital or income in that interposed entity.

The interposed entity election may be elected to commence in an income year later than the income year in which a family trust election commenced and as far back as the 2004/05 income year. However, this retrospective commencement is only possible where at all times from that earlier income year:

• the company, trust or partnership satisfied the family control test; and
• only the test individual or members of the family group have been made presently entitled to capital or income from the trust or received distributions of capital or income.

The interposed entity election may only be revoked in limited circumstances. For example, where the entity is a member of the family group i.e. where only members of the family group hold fixed entitlements to 100% of the capital and income of the trust. The interposed entity election will automatically be revoked where the underlying family trust revokes its family trust election.

Note that an interposed entity election can be made in respect of two or more family trusts where the test individual in each of these family trusts is identical. This enables different family trusts to distribute to the same interposed entity without any family trust distributions tax consequence.