Why do I need a family trust election?

The short answer is that the Tax Office does not consider a trust a family trust for tax purposes unless you have made a Family Trust Election (election).

Outside the tax meaning, a family trust is typically a discretionary trust set up to hold assets and sometimes operate businesses to benefit family members. The trustee has discretion over distributions, and the trust deed defines beneficiaries, often in several classes. These structures are common in Australia for asset protection and tax planning. However, for tax purposes, a trust is not treated as a “family trust” unless an election is made with the Tax Office.

Even if your trust is run for family members, is called a family trust, and only distributes to family, that’s not enough for the Tax Office. Without an election, your trust can’t access certain tax concessions, especially when carrying forward losses, claiming bad debt deductions, or distributing franked dividends.

A family trust election nominates someone as the “test individual.” Broadly, this person’s family group, including certain close relatives and entities they control, becomes the only group to benefit from the trust without triggering tax issues. The election is usually made in the trust tax return.

The election is generally irrevocable, so it’s a crucial decision. But it can unlock access to loss recoupment rules and franking credit concessions that would otherwise be unavailable.

Can I backdate the election? Yes, under certain conditions, you can backdate a family trust election to an earlier income year (from the 2005 income year onwards). To do this, the trust must have passed the family control test continuously from the start of that year and only made distributions to the test individual or their family group during that time. This flexibility means you might not necessarily need to make the election now if there is no immediate benefit.

What if my trust does not have losses or franked dividends? In that case, the need for an election is less clear-cut. You might make the election anyway to future-proof the trust, especially if it may later receive franked dividends or incur losses, or if it is part of a broader family group structure with other trusts with elections.

However, there is a strong counterargument: making an election locks in the trust’s distribution options. Once the election is in place, any distribution outside the family group triggers Family Trust Distribution Tax at 47%. That is a steep penalty for what might otherwise be a minor administrative oversight. Since an election can be backdated, you might prefer to wait for a clear tax benefit before committing.

Notably, another family trust with a different family member nominated as the "test individual" has a slightly different family group. Care is needed in this situation as Family Trust Distribution Tax could apply to a distribution between the two trusts. Additional steps might be required. Also, complications can arise if the test individual dies or there is a family settlement.

An election might make sense or be required. If there are no losses, no franked dividends, and no group structuring needs, it may be wiser to hold off. The ability to backdate the election gives you flexibility, so use it wisely and always seek professional advice before deciding on something that might not be able to be undone.