Beware of Family Trust Distribution Tax - A Sting in the Tail for Corporate Beneficiaries!

You have a family trust to protect and manage your wealth. Income in the amount of $100,000 from your family trust for the 2022/2023 year have been distributed to a corporate beneficiary (i.e. company) to manage your tax liabilities and taxed at 30% ($30,000).

The Tax Office has recently undertaken an audit of the family trust including reviewing the trust deed and constitution for the company. The Tax Office has raised an amended assessment to tax the trustee for the family trust on the $100,000 income distributed to the company because the Tax Office considers that the company is outside your family group. A distribution by the trustee to a beneficiary who is outside the primary individual’s family group will attract family trust distribution tax (FTDT) at 47%.

You are shocked by the tax liability of $47,000 as you understood that your accountant had arranged for a family trust election (FTE) specifying you as the primary individual so as to include the company in your family group to receive the income from your family trust.

You ask your accountant why this has occurred?

It was discovered after reviewing the constitution for the company that the directors have the discretion to declare dividends on one or more classes of shares to the exclusion of other classes of shares and at different rates. Effectively, the shares in the corporate beneficiary were issued as follows:

·         A Class shares owned by you

·         B Class shares owned by your wife

For the company to be included in your family group it must be owned by you as the primary individual, or one or more members of the primary individual’s family (including trusts) - ether by themselves or as a group (i.e. must have fixed entitlements, directly or indirectly, to 100% of the income and capital of the company).

You and your wife each would be taken to have nil% fixed entitlement to the income of the company because the company has discretionary power to pay dividends to one class of shares to the exclusion of the other classes of shares and at different rates.

Unfortunately, this has resulted in a costly distribution with a FTDT of $47,000.

When making a trust distribution, trustees and their advisers must carefully consider:

·         the trust deed for the family trust

·         the constitution for the company

·         FTE and the primary individual

Having a corporate beneficiary receiving trust income can be tax effective, but failing to carefully consider whether it is a member of the primary individual’s family group for tax purposes can be costly. 

If you have a family trust and distribute income to a company and want to review your family trust structure to ensure that it is not exposed to costly FTDT, then contact PV Legal.