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Losses need an FTE (Family Trust Election) – correct? It depends.
Losses need an FTE
When does a loss making trust need a family trust election? This is the question Geoff Stein of Brown Wright Stein Lawyers in Sydney will discuss with you in the episode.
Here is what we learned but please listen in as Geoff explains all this much better than we ever could.
To listen while you drive, walk or work, just access the episode through a free podcast app on your mobile phone.
Losses need an FTE – always?
If you have a client with a loss-making family trust, being able to use those losses is not an automatic Yes. You need to pass four tests, unless you have an FTE in place. With an FTE you only need to do the income injection test.
So it is tempting to think that an FTE is always the better option. But there is no clear yes or no answer. FTE or no FTE – both approaches bear a risk.
It often feels safer to make the family trust election, but there are also downsides in doing so.
An FTE restricts the opportunity to distribute outside of the family group. You need to be careful to make sure that you are defining the family group appropriately. And selling a trust with an FTE in place is difficult. In fact, if you want to sell the trust, you probably need to revisit your strategy and structure in its entirety.
But for most people with family trusts an FTE is a safe option.
Test Individual
It all hinges on who the test individual is. And that test individual will give you the family group.
Nominating a parent will give you a particular family group. Nominating one of the children will give you quite a different family group. So always bear the test individual in mind.
Amendment
If you receive a new client with substantial losses over many years but no family trust election, you have four options.
1 – Don’t do an FTE and leave things as they are.
2 – Do an FTE starting with the first financial year you do.
3 – Amend the past tax returns as far back as you can to start the FTE from the start of the amendment period.
4 – Apply for the commissioner’s discretion to amend and establish an FTE right from the first loss year.
If you choose option # 4, you are not in an automatic request for an amendment, but have to write and outlay your case.
Which approach is best depends on specific circumstances.
Simple Trusts
In cases where there is just a discretionary trust and the immediate family and nothing else, the case is straight forward. You make an FTE and that’s it.
But when the structure is more complicated, then FTEs can be landmine. They might be using corporate beneficiaries. They might be using other trust that they downstream to, meaning they want to distribute into or inject income into. And there might be estates and testamentary trusts. In those cases FTEs or interposed entity elections become a very problematic exercise.
After the death of the test individual you need to make sure that distributions still only hit entities that are still within the family group.
Reform
The whole family trust election group is ripe for reform. There are too many issues around the whole topic.
But it’s probably ten years away from it getting onto the agenda.
We started talking about family trust elections in 1995 and so in 2025 it will be 30 years. And after that the discussion will probably heat up.
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Disclaimer: Tax Talks does not provide financial or tax advice. All information on Tax Talks is of a general nature only and might no longer be up to date or correct. You should seek professional accredited tax and financial advice when considering whether the information is suitable to your or your client’s circumstances.
Last Updated on 15 March 2021
Tax Talks spoke to Geoff Stein - Partner at Brown Wright Stein Lawyers - for more details.
