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?
A 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) 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, 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 a 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:
- 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 Family Trust Distribution Tax (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.
How does this relate to your bigger picture?
Most families with wealth or business assets have more than one structure in play, maybe a couple of trusts, a company, a self-managed super fund, even a corporate beneficiary. Over time, these things evolve and expand.
And that’s 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 income flows through your entities.
- Estate plan: who receives what, and how?
- Business or asset sale plans: to avoid surprises down the track.
We can assist you with all of the above, call us on 1300 654 590 or email us to get started.
A word of caution
We’ve 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.
For South Australians
Finally, just a few words about South Australia. 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’ve been advised to make an FTE, treat it like any important family decision:
- 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?
- Review your existing structures. Will it create inconsistencies or compliance risk?
- Seek legal advice, especially if your trust is part of a wider family business or estate plan.
Final thoughts
A Family Trust Election 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 your accountant’s advice, they’re flagging an important tax opportunity, but also 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
A FTE might seem like a simple tax form, but it 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.
If you’re considering an FTE or if one has already been made and you’re 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.
