Many trusts have the words “family trust” in the title but just because a trust is called the Smith Family Trust doesn’t mean it meets the ATO definition of a family trust. To be considered a family trust you must specifically make a family trust election on your trust income tax return.

There can be numerous benefits to making the family trust election, some of these are:
– More relaxed tests for claiming tax losses
– More relaxed tests for injecting other income into a trust (to utilise tax losses)
– Ability to claim over $5,000 in franking credits

However as a consequence of making the family trust election you can then only distribute income within your family group. If your trust distributes income outside of your family group the distributions are taxed at the highest tax rate (currently 49%).

The family group revolves around a main person (nominated as the “test person”) which is chosen when you make the family trust election.

For more information on individuals that are part of the family group, click here.

Additional members of the family group can include:
• Estates of the individuals above
• Family Trusts with the same test person
• Companies or Unit Trusts 100% owned by the above
• Certain other entities (less common)

If you have losses in your trust or receive franked dividends of $11,667 or more for the year, you may need to consider whether a family trust election needs to be made.

Pro tip: Family trust elections can be back-dated to 1 July 2004 or later as long as distributions have not been made outside the family group during that time.

Author: Stacey Walker