If your business operates through a family discretionary trust — and there’s a bucket company or holding structure involved — there are two tax elections you need to know about. Not because your accountant mentioned them in passing, but because getting them wrong can trap losses in your structure, create unexpected tax bills, or cost you the ability to use franking credits.
This guide is part of our complete guide to trusts in Australia.
These are the family trust election (FTE) under section 272-80 of Schedule 2F of the Income Tax Assessment Act 1936, and the interposed entity election (IEE) under section 272-85 of the same Act. Together, they define how your trust interacts with the tax loss provisions and how distributions can flow through your structure without triggering punitive tax.
This article explains what each election does, when it’s required, and the real-world consequences of getting it wrong — in plain language, without the legislation jargon.
These elections are not something most accountants proactively raise — but they matter enormously for business owners with trust structures, bucket companies, or multiple entities. If your structure has been in place for a few years and you’ve never heard of a family trust election, it’s worth asking the question.
What Is a Family Trust Election?
A family trust election is a formal choice you make to have your discretionary trust treated as a “family trust” for tax purposes. Once made, the election specifies a single individual — called the test individual — whose family group the trust must generally distribute income and capital to.
The test individual is typically the patriarch or matriarch of the family — the parent or grandparent who the broader family wealth flows through. Their “family group” under the legislation includes:
- The test individual themselves
- Their spouse
- Their parents and grandparents
- Their siblings (and their spouses)
- Their children, grandchildren, and lineal descendants
- The spouses of those children and grandchildren
- Companies and trusts controlled by members of the family group (once an IEE is made — more on this below)
Distributing income or capital outside this family group triggers Family Trust Distribution Tax (FTDT) — currently charged at the top marginal tax rate of 47% (including Medicare levy). This is a serious deterrent, so once an FTE is made, distributions must stay within the defined family group or the tax cost is severe.
What are the benefits of making a family trust election?
The main benefit is access to the trust loss provisions in Schedule 2F of the ITAA 1936. These provisions govern:
- Whether a trust can carry forward and use prior year losses
- Whether a trust can transfer losses to other group entities
- Whether a trust can benefit from franking credits flowing from a company in which it holds shares
- The distribution requirements that must be satisfied to access these benefits
Without an FTE, a discretionary trust must satisfy alternative tests (the “income injection test” and the “pattern of distributions test”) to use losses — tests that are notoriously difficult to pass and that often result in losses being permanently trapped.
With an FTE in place, the trust bypasses those tests. Losses are accessible as long as distributions remain within the family group. For business owners with trust structures that hold shares, property, or operating businesses, this is a significant practical advantage.
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What Is an Interposed Entity Election?
An interposed entity election (IEE) is made by an entity that sits between individuals and a family trust — most commonly a private company or another trust that is itself a beneficiary of the family trust.
The most common scenario in a typical small-to-medium business structure looks like this:
Common Structure
Trust → Distributes profit to → Bucket Company → Accumulates and reinvests profits at 25–30% tax rate
The bucket company is “interposed” between the trust and the ultimate individual shareholders. Without an IEE from the bucket company, it sits outside the family group — meaning the trust’s ability to pass losses or access certain provisions may be compromised.
By making an IEE, the bucket company (or interposed trust) formally joins the family group. This means:
- Distributions from the FTE trust to the company do not risk triggering FTDT
- The company is treated as part of the family group for trust loss purposes
- The consolidated structure can use trust losses that would otherwise be inaccessible
The IEE must specify the same test individual as the FTE — they are linked elections, not independent choices.
When Is a Family Trust Election Required?
Technically, there is no law that compels you to make a family trust election. But there are several situations where making one becomes commercially necessary — and where failing to make it carries real cost.
1. The trust wants to use prior year losses
This is the most common trigger. If your trust ran at a loss in a prior year (from property, an operating business, or investment activity), and you want to offset that loss against future income, the trust must satisfy one of the trust loss tests. For most discretionary trusts, the FTE is the simplest and most reliable path — the alternatives are highly restrictive.
2. The trust holds shares in companies and wants to access franking credits
When a company pays a dividend with attached franking credits to a trust, the trust can generally pass those credits to its individual beneficiaries. But whether those credits can be used by the trust beneficiaries depends on the trust satisfying certain conditions (see our guide to franking credits when a company is held in a family trust). An FTE makes this process cleaner and more defensible under ATO scrutiny.
3. A restructure introduces a company or new trust as a beneficiary
If you add a bucket company or holding company to your structure as a beneficiary of the trust, you are potentially moving outside the natural family group without an IEE in place. An FTE and accompanying IEE should be put in place before or at the time of the restructure — not discovered three years later.
4. The ATO conducts a review of the trust’s distributions
The ATO’s trust tax compliance program looks closely at how discretionary trusts distribute income and to whom. Trusts with consistent distributions to low-tax-rate beneficiaries or corporate beneficiaries can attract attention. Having an FTE on file is one clear marker that the structure is compliant and intentional rather than opportunistic.
The family trust distribution tax rate of 47% applies to any distribution outside the family group — including past distributions if the ATO determines an FTE was required. This is not a theoretical risk. In practice, business owners discover this when they have made distributions to a new corporate beneficiary without an IEE and their accountant picks it up in a review years later.
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Book a ConsultationWhen Is an Interposed Entity Election Required?
An IEE is required whenever a company, trust, or partnership:
- Is a beneficiary of a trust that has made (or wants to make) an FTE, and
- You want that entity to be treated as part of the family group for trust loss and distribution purposes
The practical test is simple: if any entity in your structure receives a distribution from your trust, and that entity is not an individual who falls naturally within the test individual’s family, then an IEE is likely needed.
Common entities that need IEEs:
| Entity type | Typical scenario | IEE needed? |
|---|---|---|
| Bucket company | Receives trust distributions at corporate tax rate | Yes — almost always |
| Holding company | Holds shares in operating trust beneficiaries | Yes |
| Second discretionary trust | Another family trust receives distributions for further discretion | Yes — needs its own IEE and potentially its own FTE |
| Individual beneficiary | Adult children, spouse, parents | No — individuals within family group need no IEE |
When Can the Elections Be Made — and Can They Be Backdated?
Both the FTE and IEE can be made at any time during the income year, and they take effect from the start of that income year — or from an earlier income year, right back to when the trust was established.
This backdating option is a significant practical benefit. If you have held a structure for several years without an FTE, you can often make the election retrospectively. However, there are limits:
- The election cannot be backdated to a year where it would retroactively change a distribution that was made outside the family group — you cannot retrospectively fix an FTDT event that already occurred
- Backdating is allowed only where the trust would have satisfied the family trust conditions during that earlier period — meaning the pattern of distributions must have been consistent with the family group even before the election was formally made
- The ATO can question retrospective elections if the timing appears to be motivated by tax avoidance rather than regularising the structure
If you have had a bucket company or corporate beneficiary in your structure for years and have never made an IEE, it is worth reviewing immediately. In most cases, the election can be backdated and the structure regularised without significant cost. Delay increases the risk that a distribution event has occurred that cannot be unwound.
Real-World Scenarios: How These Elections Apply
Scenario 1: The trading trust with a loss year
Background
A Melbourne plumbing business operates through a family discretionary trust. In the 2023–24 year, the business incurred a $120,000 loss due to a slow period and upfront capital costs. The trust has never made an FTE. The following year, the business returns to profit and the trustee wants to apply the prior year loss against the new income.
The problem: Without an FTE, the trust must pass the income injection test and the pattern of distributions test to use the prior year loss. The income injection test asks whether new income was injected into the trust in a way that enables the loss to be used. The pattern of distributions test looks at whether distributions were made to the same beneficiaries in the prior loss year. A discretionary trust that changed its distribution pattern — even for legitimate reasons — may fail this test.
The solution: Make a retrospective FTE covering the loss year. As long as distributions in the loss year were made within what would have been the family group, the election regularises the structure and makes the $120,000 loss available in the current year.
Scenario 2: The trust structure with a bucket company added late
Background
A family trust was set up in 2018 and distributions have been made to individual family members since establishment. In 2023, the accountant recommends adding a bucket company to accumulate profits at the 25% base rate. The company is made a beneficiary and the trust distributes $180,000 to it in 2024.
The problem: The bucket company is not a natural member of the family group. Without an IEE made before the distribution, the $180,000 distribution is a distribution outside the family group — triggering FTDT at 47%. The total tax bill on that distribution: approximately $84,600 in FTDT alone, before any tax at the company level.
The solution: Make the FTE (nominating the head of the family as test individual) and IEE (from the bucket company) prior to the first distribution to the company. If the structure has already been running without elections, seek advice immediately about whether backdating is possible and whether any FTDT exposure exists.
Scenario 3: Two discretionary trusts — one distributing to another
Background
A property-holding trust distributes rental income to a trading trust. The trading trust then distributes to family members. The property trust makes an FTE. The trading trust is a beneficiary of the property trust but has not made an IEE.
The problem: The trading trust is an interposed entity. Without an IEE, it sits outside the family group and distributions from the property trust to it may be subject to FTDT.
The solution: The trading trust makes an IEE specifying the same test individual as the property trust FTE. It may also need to make its own FTE if it wants to access loss provisions for its own distributions.
What Happens If You Never Make These Elections?
For many family trusts, the absence of an FTE causes no immediate problem — until something goes wrong. The elections matter most when:
- The trust has a loss year and needs to use it
- A new entity joins the structure as a beneficiary
- Franking credit benefits need to flow through to individuals
- The ATO scrutinises the distribution pattern
- The structure is restructured, sold, or transferred
The risk of not having elections in place is not abstract. The ATO has increased its audit activity on trust structures, particularly around unpaid present entitlements (UPEs), Division 7A, and trust distributions to corporate beneficiaries. A structure without proper elections is more exposed.
More importantly, the elections are relatively straightforward to make when planned in advance. They become complex — and sometimes impossible to fix without cost — when addressed reactively after a problem has occurred.
Frequently Asked Questions
Is a family trust election the same as setting up a family trust?
No. Setting up a family trust is a legal step — you create the trust deed, appoint a trustee, and register the ABN/TFN. A family trust election is a separate tax choice made with the ATO. You can have had a family discretionary trust for 20 years and never made the election. Many business owners in this situation are unaware they have options — or gaps — until a restructure or loss event surfaces the issue.
Can you revoke a family trust election once it’s made?
In very limited circumstances, yes — but revocation is not straightforward and the ATO’s approval is required. Once an FTE is in place, the practical approach is to ensure your distribution decisions remain consistent with the family group. Most structures do not need to revoke; they need to extend the family group via IEEs as the structure grows.
If I make a family trust election, does that mean I can only distribute to family members?
Essentially, yes — to entities and individuals within the defined family group of the test individual. You can add companies and trusts to the family group via interposed entity elections. But if you need to distribute to someone genuinely outside the group — a business partner, an unrelated investor, a charity — FTDT will apply at 47%. For trusts that have diverse beneficiaries, an FTE may not be the right structure, and alternative approaches should be explored.
My accountant set up the trust years ago. How do I know if these elections have been made?
The elections are lodged with the ATO and recorded on the trust’s tax account. Your accountant or tax agent can check the ATO’s records. Alternatively, if you have copies of your prior year trust tax returns, the FTE status is noted. If you’ve changed accountants and aren’t sure, this is worth checking proactively — especially if your structure includes a corporate beneficiary.
Does every family trust need to make a family trust election?
No — many simple family trusts (where income is distributed solely to individual family members, no losses have occurred, and no corporate beneficiaries exist) operate without elections and have no issue. The elections become important when the structure becomes more complex. But given how common bucket companies, loss years, and property holding trusts are in growing businesses, it’s worth understanding your position regardless of where you sit today.
What is the ATO form for making a family trust election?
The election is made using the ATO’s Family trust election, revocation or variation form (NAT 2787). The interposed entity election uses the Interposed entity election or revocation form (NAT 2788). Both are available on the ATO website. These forms should be completed by your registered tax agent and lodged through the ATO’s systems — this is not something to do without advice, as the test individual designation and effective date have long-term consequences.
Frequently Asked Questions
What is a family trust election (FTE)?
A family trust election is a formal choice a trustee makes to the ATO to have a discretionary trust treated as a family trust for tax purposes. It nominates a test individual and restricts distributions to that person’s family group, but in return unlocks access to franking credits, the trust loss rules and other concessions.
What is an interposed entity election (IEE)?
An interposed entity election brings another entity, such as a company, partnership or trust, inside an existing family trust’s family group. It allows that entity to distribute to, or receive from, the family trust without triggering family trust distribution tax, provided distributions stay within the group.
Do I have to make a family trust election?
Not always. An FTE is required to pass the trust loss tests, to access franking credits on franked dividends the trust receives, and in some holding structures. Many family trusts make one, but it should be a deliberate decision because it permanently narrows who can receive distributions.
What is family trust distribution tax?
If a family trust or an interposed entity distributes income or capital outside the nominated family group, the ATO imposes family trust distribution tax at 47% on that amount. This is why the choice of test individual and the timing of an election need careful planning up front.
Can a family trust election be revoked?
An FTE can only be revoked in very limited circumstances, generally within a short window and only where the trust still meets the family control test. In practice an FTE should be treated as permanent, so the test individual and family group must be chosen with the long term in mind.
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