Family trust elections: 31 December 2026 and historical tax risk
If a trust in your family group has made a family trust election, 31 December 2026 is an important date.
For many years, the practical understanding of family trust election rules was relatively simple: keep distributions within the family group or risk family trust distribution tax. So family groups and accountants readily complied with that principle.
That was broadly how the rules were expected to operate when introduced. The original 1997 Explanatory Memorandum said family trust distribution tax “need not ever be paid” and expressed the hope that it would “never need to be collected”. The Government’s Second Reading Speech made the same point. It was intended principally as an integrity measure to keep distributions within the family group, rather than as a significant source of tax revenue.
For almost three decades the tax attracted relatively little compliance attention. More recently, the ATO has increased its focus on historical family trust election issues, including technical errors in otherwise related family structures.
In 2026, the Law Council of Australia, The Tax Institute and Australia’s major accounting and tax professional bodies called for reform, raising concerns that the current regime and increased ATO compliance activity can impose severe and extraordinary liabilities for historical administrative or technical errors where there has been no underlying tax avoidance.
The difficulty is that the statutory definition of the family group is more technical than it appears. In recent years the ATO has identified cases where distributions were made to related companies, trusts or family members that everyone assumed were within the group but technically were not, or where an election assumed to exist had not been made or could no longer be evidenced.
The consequences can be severe. A distribution outside the family group can attract family trust distribution tax at 47%, and historical errors can also carry many years of general interest charge.
That is a very different outcome from the original expectation that the tax would rarely, if ever, need to be collected. It can produce a disproportionate result where the underlying problem was an old election, incomplete records or a technical misunderstanding rather than an attempt to divert income outside the family.
Until 31 December 2026, the ATO has a temporary concession under which taxpayers who identify and voluntarily disclose an historical family trust distribution tax liability before an ATO review begins may receive an 80% remission of the associated general interest charge. The underlying tax cannot be remitted.
For most family groups there will be no problem. The ATO’s current focus nevertheless makes it important that clients understand the issue and decide whether their circumstances warrant a review. However, family trust elections are often old, technical, poorly understood, and the cost of getting them wrong can be significant. They are conceptually simple but technically complicated – like rather too much of our tax system.
What a family trust election does
A family trust election nominates a specified individual who defines the trust’s statutory family group.
Elections are commonly made to access:
- trust losses;
- franking credits;
- simplified ownership and tracing rules; and
- some small business restructure concessions.
The trade-off is that distributions need to remain within the statutory family group to avoid family trust distribution tax. The statutory family group is not necessarily the same as the beneficiaries listed in the trust deed.
What can go wrong
Family trust distribution tax can apply at 47% where income or capital is distributed outside the relevant family group.
Problems commonly arise where:
- the election was made many years ago and nobody knows who the specified individual is;
- the original election documentation cannot be located;
- different trusts in a group have different specified individuals although usually within the same family;
- distributions have been made to companies or other trusts with an assumption they are part of the statutory family group;
- ownership or family circumstances have changed; or
- distributions have been made to extended family members who fall outside the statutory definition such as aunts, uncles and cousins.
The definition of a distribution is also wider than a normal trust distribution. It can include loans, use or transfers of property, forgiveness of debts and other benefits provided for less than adequate value.
The tax is generally payable shortly after the relevant distribution and interest can then accrue for many years. There is generally no ordinary time limit preventing the ATO from pursuing an historical family trust distribution tax liability.
Why 31 December 2026 matters
Until 31 December 2026, the ATO may remit 80% of the general interest charge where the taxpayer:
- reviews the position before an ATO review begins;
- identifies and reports the liability;
- pays the family trust distribution tax; and
- applies for remission.
After that date, ordinary interest-remission rules continue to apply, but this temporary concession ends.
This is therefore not an amnesty from the tax itself. It is an opportunity to substantially reduce the interest cost where an historical liability is identified voluntarily.
When should you consider a review?
Family trust elections are a risk-management issue, but we do not believe every family group requires a detailed historical review.
You should consider asking us to review your position if:
- you cannot identify the specified individual;
- the original election is missing;
- your group contains several trusts or companies and you are uncertain whether entities receiving distributions are within the relevant family group;
- distributions have been made to extended family members;
- there have been significant changes in ownership, succession or family circumstances; or
- you are otherwise uncertain whether entities receiving distributions fall within the relevant family group.
None of these necessarily means there is a problem.
There is also a practical reason for any review to be appropriately scoped. Once an historical issue is identified, it may need to be addressed even where it arose many years ago. The objective should therefore not be an open-ended search for possible historical defects, but a proportionate review where there is a reasonable basis for one.
A historical family trust election review is not something we undertake automatically for every client group. If you would like your group’s position reviewed, please contact us so that we can first agree the appropriate scope of the review.
Where a review identifies a potential issue, we can establish whether a family trust distribution tax liability actually exists, quantify any tax and interest exposure and advise on the available options, including the ATO’s current interest remission concession.
Where to read more
General information only. This article does not constitute a review of your group’s family trust election position. Please contact us if you would like us to consider your circumstances.
