What Is a Family Trust Election in Australia?

A family trust election (FTE) is a pivotal legal step in the administration of a discretionary family trust under Australian tax law.

It defines how the trust is recognised by the Australian Taxation Office (ATO), who qualifies as a beneficiary, and whether the trust can access crucial tax concessions such as loss recoupment and franking credits.

For trustees, accountants, and families managing intergenerational wealth, understanding this election is essential to preserve compliance and protect financial integrity. If you’re unsure where to begin or require professional assistance, exploring find a good family law lawyer can help ensure the trust is established and administered correctly under Australian law.

For trustees, accountants, and families managing intergenerational wealth, understanding this election is essential to preserve compliance and protect financial integrity.

How a Family Trust Election Operates Under Australian Law

A family trust election is a formal notice lodged with the ATO that designates a test individual — the person whose family group defines the trust’s eligible beneficiaries.

Once this election is made under Schedule 2F of the Income Tax Assessment Act 1936 (Cth), the trust is treated as a family trust for tax purposes.

From a legal perspective:

• The FTE does not alter the equitable or legal ownership of assets; it determines tax recognition and compliance boundaries.
• All distributions must remain within the family group of the nominated test individual.
• The election remains effective indefinitely, unless revoked or varied in limited circumstances approved by the ATO.

This mechanism provides legal certainty for tax administration and shields trustees from inadvertent breaches of the Family Trust Distribution Tax (FTDT) regime.

Key Legal Advantages of Making a Family Trust Election

The legal and fiscal advantages of making a valid family trust election extend beyond taxation. It provides structural legitimacy and risk mitigation that align the trust with both equity principles and statutory obligations.

• Eligibility for Trust Loss and Bad Debt Provisions; A trust with a valid FTE may carry forward losses or bad debts under Division 267 of Schedule 2F, provided distributions stay within the defined family group.
• Exemption from Family Trust Distribution Tax (FTDT): Once the FTE is in place, distributions to members of the family group are exempt from FTDT, which otherwise attracts a penalty rate of 47%.
• Access to Franking Credit Flow-Through: Franked dividends received by the trust can be passed to eligible beneficiaries with corresponding tax offsets, ensuring efficient income distribution.
• Enhanced Legal Clarity and Audit Protection: The election serves as a formal declaration of beneficiary scope, reducing ATO scrutiny and clarifying the trust’s compliance position.

Together, these features make the FTE an essential compliance instrument for family-controlled business and investment structures.

Legal and Tax Risks of Not Making an Election

Operating a discretionary trust without a family trust election is lawful, but it carries substantial limitations and compliance risks under Australian tax law:

• The trust cannot access loss recoupment or bad debt deductions.
• Distributions outside the immediate family group may trigger FTDT.
• Beneficiary definitions become legally ambiguous, exposing trustees to potential ATO reassessment.
• Failure to demonstrate a “pattern of distributions” may disqualify the trust from key tax concessions.

From a legal risk perspective, an unelected trust lacks the structural clarity that both accountants and solicitors rely on to demonstrate compliance. Over time, this can lead to disputes over control, taxable distributions, and the scope of equitable interests.

When and How to Lodge a Family Trust Election

A family trust election must be formally lodged with the ATO using Form NAT 2787.

The election can be made when the trust lodges its first income tax return or at any time thereafter, provided it meets eligibility criteria.

The following procedural steps are recognised under ATO administrative law:

1. Identify the Test Individual: The nominated person must be central to the family’s financial and managerial control — typically a parent or founder.
2. Define the Family Group: This includes the test individual’s spouse, children, parents, siblings, grandchildren, and certain controlled entities or trusts.
3. Complete and Lodge the Election Form: The trustee must submit Form NAT 2787 by the due date for lodgement or by the time the election first needs to take effect.
4. Maintain Compliance Post-Election: All future distributions must remain within the family group. Any deviation can trigger FTDT or invalidate loss deductions.

Example — Family-Owned Business Using a Trust Structure

A family operates a small enterprise through a discretionary trust with a corporate trustee. After making a family trust election naming the parent as the test individual, the trust distributes profits to that parent and a family-owned company.

Because the FTE is in force, these distributions are exempt from FTDT and qualify for franking credit pass-through. Had the election not been made, distributions to the company could have been taxed at the top marginal rate under the anti-avoidance provisions of Schedule 2F.

Legal Implications for Family Businesses and Inter-Entity Structures

For family businesses, the FTE is more than a compliance step — it underpins the lawful functioning of multi-entity structures.

By aligning the trust’s beneficiary scope with ATO definitions, the election allows:

• Lawful income distributions between family-owned companies and trusts;
• Consolidation of tax losses across entities within the same family group; and
• Eligibility for small business concessions and franking credit flow-through without breaching the distribution rules.

Without this alignment, complex family structures risk breaching Division 7A or FTDT rules — both of which carry serious tax penalties and compliance exposure.

FAQs: Family Trust Election in Australia

Before establishing or varying a family trust election, trustees often seek clarity on its operation, permanence, and tax impact. The following legal FAQs address the most frequent queries.

What is the purpose of a family trust election?

A family trust election formally designates a trust as being restricted to a single family group.

It ensures access to concessions under the Income Tax Assessment Acts and protects the trust from FTDT liability.

Practically, it enables smoother ATO audits and provides clear legal boundaries for income distribution, reducing ambiguity over beneficiary eligibility and control.

Who should be nominated as the test individual?

The test individual should be the person who effectively controls the trust — usually the senior family member or founder.

The selection is strategic and permanent: it defines which relatives and entities form the family group.

An inappropriate nomination can complicate succession planning or restrict future distributions, so legal advice is recommended before lodging the election.

Can a family trust election be revoked or changed?

Generally, no. Once made, a family trust election is irrevocable except under limited circumstances approved by the ATO — for example, where the trust was misclassified or the election was lodged in error.

Changing the test individual requires a new election, and the trust must continue to satisfy the family-group definition to remain compliant.

What happens if a trust is distributed outside the family group?

Distributions to persons or entities outside the family group trigger Family Trust Distribution Tax (FTDT) at 47%.

This penalty applies regardless of intent and is designed to deter tax leakage beyond the elected family boundaries.

Trustees must therefore review distribution resolutions annually and document all payments to ensure beneficiaries remain within the elected group.

Is an FTE mandatory for every family trust?

No. The election is optional but strongly recommended where the trust:

• Holds business or investment assets;
• Intends to distribute income to companies or other trusts; or
• Needs to carry forward losses or bad debts.

Without the election, trustees lose eligibility for many statutory concessions and risk inadvertent non-compliance with ATO trust loss provisions.

Conclusion: Legal Significance of the Family Trust Election

The family trust election represents a cornerstone of trust governance and taxation in Australia.

It transforms an ordinary discretionary trust into a compliant, legally defined entity for ATO purposes — safeguarding the family’s financial ecosystem from penalty taxes and uncertainty.

For families and businesses managing intergenerational assets, making an FTE is both a legal safeguard and a strategic tax decision.

While the process appears administrative, its implications are enduring and legally binding. To ensure accuracy in drafting, selection of the test individual, and compliance with the Income Tax Assessment Acts, consultation with an experienced solicitor or tax adviser is essential.

For expert assistance with trust establishment, election lodgement, or compliance review, visit LegalFinda — Australia’s trusted legal platform connecting clients with qualified professionals in trust and taxation law.