If you’re running a family business or managing family wealth through a trust, chances are your accountant has recommended that you “make a Family Trust Election” (or FTE for short).
If your response was, “Sure… what exactly is that?”, you’re not alone.
Let’s demystify what this election is, why it’s coming up now, and why it’s worth talking to a lawyer before you commit.
What is a family trust election?
An FTE is a formal declaration to the ATO that your trust is being used for the benefit of a particular family, and you are committing to keeping it that way.
You make the election by nominating one person (called the test individual) around whom your “family group” is defined. The trust then agrees that it will only distribute income and capital within that family group or pay a hefty 47% penalty tax (the Family Trust Distribution Tax or ‘FTDT‘) if it goes outside these lines.
The election is lodged once with the ATO (typically as part of your trust’s annual tax return for the relevant year) and, importantly, it’s irrevocable. Once made, you can’t change your mind, even if the test individual dies. The FTE then applies to all future years.
Why does the ATO require a family trust election and is it mandatory?
In times past, investment bankers came up with creative ways to ‘trade’ in certain tax benefits associated with trust income. This included trading ‘trust losses’ and the benefit of ‘franking credits’ attaching to dividends flowing through trusts. In response to this activity, the Government brought in a raft of anti-avoidance provisions applying to trusts, which specifically made it hard (almost impossible) for discretionary trusts to utilise tax losses or pass on the benefit of franking credits.
So as not to unduly impact all the small and medium sized businesses and families holding significant wealth in discretionary trusts, a concession was made to apply a milder version of these anti-avoidance rules to qualifying ‘family trusts’.
The FTE is how qualifying family trusts are identified. By making an election you are voluntarily drawing a clear boundary around who your trust can benefit without triggering anti-avoidance rules. The FTE is a voluntary but formal commitment that says: “We’re only distributing within our family, and we accept the tax consequences if we go outside it.”
Making the election is not compulsory, and many trusts operate perfectly well without it – particularly trusts without losses and without franked dividend income. However, if your trust wants to access certain tax concessions, then the ATO makes the FTE a prerequisite. In short: it’s optional, but increasingly essential in more complex or tax-sensitive trust structures.
Why is it being recommended?
In most cases, accountants suggest making an FTE to unlock or protect valuable tax benefits, such as:
- Claiming past tax losses (e.g. from earlier years where the trust made a loss);
- Receiving and passing on franked dividends (from companies that have already paid tax);
- Simplifying ATO rules for distributing income through complex structures (like other trusts or companies); and
- Avoiding penalty tax when using interposed entity elections or corporate beneficiaries.
These are real benefits (or lack of penalties), but they come with real trade-offs.
Not sure if an FTE is suitable for your trust? We can review your structure and provide tailored advice for your circumstances, call us on 1300 654 590 or email us to get started.
What’s the catch?
The catch is flexibility.
When you make an FTE, you are agreeing to distribute income and benefits only within the ATO’s definition of your ‘family group’, not necessarily what your trust deed says is permitted. (Most trust deeds permit an extremely wide range of beneficiaries that extends well beyond your family members.)
This might sound like a technicality, but it can have serious consequences down the track, some common situations we see arise include:
- You might want to give something from your family trust to a family trust set up by your daughter and her husband, but if their trust sits outside the ATO-defined group for your trust, you could be hit with FTDT at 47%.
- You might want to include future grandchildren, in-laws, or family members in blended families but if they’re outside the defined group, they’re excluded too.
- You may later restructure or sell assets, only to discover that the FTE restricts what you can do, or triggers tax costs you didn’t anticipate.
- You may be restricted as to the options available to put in place a succession plan for your trusts that have FTEs in place, due to a desire to benefit family members outside of the defined group (particularly in the case of blended families). In some cases, the only solution available is to restructure assets into a more suitable family trust before the succession plan is implemented. Obviously, this can be less than ideal, and at significant tax cost.
How does this relate to your bigger picture?
Most families with wealth or business assets have more than one structure in play, and there are often a couple of trusts in place. Over time, these structures evolve and expand.
This is the key reason to pause before ticking “yes” to the FTE. Making an FTE is a strategic move not just a tax admin task.
It should align with your:
- Succession planning: who will eventually control or benefit from the trust?
- Investment structures: how does investment income flow through your entities, and is this likely to change in future?
- Estate plan: who receives what, and how?
- Business or asset sale plans: to avoid surprises down the track when timing is critical.
If you want advice about making an FTE, call us on 1300 654 590 or email us to get started.
A word of caution
You need to proceed with caution when deciding whether or not to make an FTE. We have seen cases where FTEs were:
- Made without understanding the full consequences;
- Lodged with the wrong test individual;
- Made too late to claim the tax benefit that prompted the advice; or
- Inconsistent with other documents like Wills, shareholder agreements or family constitutions.
In these cases, unwinding the damage wasn’t easy and, in some cases, not possible. There have been high profile cases in Australia where prominent families that use trusts in their structures have been stung hard by the FTDT.
An extra note about trusts in South Australia
Finally, just a few words about South Australian trusts. An FTE is irrevocable and does not end when the test individual dies. The practical consequences of that death can be profound. The family group remains permanently anchored to a person who no longer exists, freezing the boundaries of who can benefit from the trust.
This issue is particularly acute in South Australia, which does not have a statutory rule against perpetuities. Unlike other states, where trusts usually vest after 80 years or 125 years in Queensland, South Australian discretionary trusts can continue indefinitely, meaning the consequences of a poorly chosen test individual can persist for generations.
In other words, an FTE made today may still be constraining distributions 80 or 100 years from now, long after the original family circumstances have changed. This is why the choice of test individual – and whether an FTE should be made at all – is not just a tax decision, but a long-term structural one.
So, what should you do?
If you have been advised to make an FTE, don’t think of it as a box to tick – think of it as an important family decision. We suggest you consider the following before committing:
- Ask, why now? Is there a tax event (e.g. a sale or dividend) that depends on it?
- Check who’s in and who’s out. Will the election restrict anyone you may want to benefit? Consider circumstances now, and post-death.
- Review your existing structures. Will it create inconsistencies or compliance risk? Will it restrict or change how you manage your affairs?
- Seek legal advice, especially if your trust is part of a wider family business or estate plan.
Raise these questions with your professional advisors and seek clarity before an irrevocable decision is made. If the decision to be made is time sensitive, try to raise these questions early so that you can have as much time as possible to decide how to proceed, rather than rushing into a quick decision.
Final thoughts
An FTE isn’t just a tax form; it’s a permanent structural decision that can affect how your wealth is managed and distributed for years to come.
By all means, listen to the advice when your accountant mentions an FTE. They’re flagging an important tax opportunity. However, take the time to understand how the election fits into your legal and strategic framework. In a family business or wealth context, the right structure isn’t just about tax, it’s about fairness, flexibility and future-proofing.
How we can help
Making an FTE can have lasting consequences for your business structure, estate planning, and ability to distribute income within your family. Our experienced legal team can help you:
- Review whether an FTE is appropriate for your trust;
- Identify who should be nominated as the test individual;
- Ensure the election aligns with your existing trust deed, company and trust structures, and future succession plans;
- Advise on any Interposed Entity Elections (IEEs) needed to avoid penalty tax;
- Document the trustee’s decision-making process to protect against future disputes or ATO scrutiny; and
- Assist you with future distributions decisions that may be impacted by an FTE or IEE.
We can also work closely with your existing accounting team, to ensure that all advisors are involved and informed of our advice.
If you are considering an FTE or if one has already been made and you are not sure what it means for your broader plans, we’d be happy to help you get clarity and confidence. Call us on 1300 654 590 or email us to get started.
The information contained in this post is current at the date of editing – 16 July 2026.