14 July 2025 | Family Trusts - Risks and Pitfalls | By Jonathan Ortner and Micaela Bernfield from Arnold Bloch Leibler

Meeting summary for 14 July 2025 | Online | Family Trusts - Risks and Pitfalls (2025-07-14)

 

Quick recap

The CPA Strategy Taxation Discussion Group held an online meeting in July 2025 to discuss family trust distribution tax provisions, with about 130 registrants attending. The session featured presentations by tax experts Jonathan Ortner and Micaela Bernfield, who explained the complexities and challenges of family trust elections, including requirements, implications, and potential risks. The speakers covered various aspects of family trust distribution tax, including its historical context, requirements for making elections, and implications for trust distributions and loss carry-forward rules.

Next steps

• Henry to circulate the detailed tax paper on family trust elections to attendees within the next few days. • Attendees to contact Henry directly if they do not receive the tax paper within a few days. • Jonathan and Micaela to be available for further questions or assistance from attendees regarding family trust elections. • Teddy to organize next month's online session.    

Summary

Webinar Registration and Logistics Discussion

Henry and Teddy discuss the unexpected high number of registrations for their webinar, with about 130 people signed up. They mention issues with sending the meeting link to some participants and discuss changing the way they organize future sessions. Jonathan and Micaela join the call, and Teddy informs Jonathan about the number of registrants waiting in the virtual waiting room, ready to start when Jonathan gives the go-ahead.

Video Connection Troubleshooting Session

The team experiences technical difficulties with Micaela's video connection. After several unsuccessful attempts to resolve the issue, including checking camera settings and restarting the session, Henry sends a new meeting link to Micaela. Jonathan then successfully invites Micaela to join the meeting, and she is admitted from the lobby. During the troubleshooting, the team briefly discusses their experiences with energetic children during the weekend.

CPA City Taxation Discussion Group

Teddy Kosasih welcomes attendees to the CPA City Taxation Discussion Group's online meeting for July 2025. He introduces himself and Henry Kwok as the conveners, explaining that the group meets monthly to provide a forum for professionals to exchange information and share knowledge on topics of common professional interest. Teddy outlines the housekeeping rules, including how to ask questions and the recording of the webinar, and introduces the speakers for the session, Jonathan Ortner and Micaela Bernfield.

Family Trust Tax Provisions Review

Jonathan and Micaela, tax experts from a law firm, present on the family trust distribution tax provisions. Jonathan explains that these provisions have been increasingly scrutinized by the Australian Taxation Office in the past six months, leading to significant disputes. He suggests that legislative reform may be necessary due to the complexity and uncertainty of the current provisions, which are being used as a revenue-raising tool contrary to their original intent. Jonathan outlines the background of the family trust concept, which was introduced as part of the Trust Loss regime in the 1990s to prevent trust loss trading schemes. He then discusses the benefits of making a family trust election, including simplified trust loss carry-forward rules and the ability to pass franking credits through to beneficiaries of discretionary trusts.

Family Trust Election Requirements

Micaela explains the four requirements for making a family trust election. She emphasizes the importance of selecting an appropriate test individual, as this defines the family group for the trust. Micaela notes that the election must be made in writing using an approved form, and she details the specific requirements for this form. She also mentions that since 2005, it has not been necessary to submit the election to the Commissioner.

Family Trust Election Dispute Case

Micaela discusses a case involving a dispute between the Commissioner and a trustee regarding the existence of a family trust election. She explains that in the Widow case, the trustee had indicated a family trust election in tax returns for eight years before distributing a capital gain to an entity outside the presumed family group. The courts, while not directly ruling on the validity of the family trust election, found that the Commissioner had a reasonably arguable case based on the trust's tax return history and distribution patterns. Micaela mentions that a similar issue is being addressed in the ongoing BRKK and Commissioner of Taxation case.

Family Trust Election Requirements

Micaela explains the third and fourth requirements for making a family trust election. The third requirement involves specifying an income year, which must be before the year the election is made, and must satisfy two conditions related to the family control test and distributions. The fourth requirement is that the trust must pass the family control test at the end of the specified income year. Micaela emphasizes that the earliest point an election can be made is immediately after the specified income year, based on how the family control test requirement is drafted.

Family Trust Distribution Tax Overview

Jonathan explains the Family Trust Distribution Tax (FTDT) and its implications. He notes that FTDT is not subject to the usual income tax assessment procedure, and the debt becomes due immediately upon breach of the provision. This allows for the imposition of general interest charges, potentially leading to significant liabilities. The tax liability extends to directors of trustee companies and companies with interposed entity elections. Jonathan also discusses how the rules attempt to prevent double taxation by making distributions to outsiders non-accessible, but points out that this system is imperfect, as it can result in the loss of franking credits. He then elaborates on the broader meaning of "distribution" in the context of FTDT, which can include transactions with non-beneficiaries and interest-free loans to outsiders.

Family Group Trust Election Concepts

Micaela explains the concept of family group in the context of family trust elections and interposed entity elections. She emphasizes the importance of understanding who qualifies as a member of the test individual's family group, as distributions to outsiders can trigger family trust distribution tax. Micaela clarifies that 'family' and 'family group' have distinct meanings in the legislation, and provides examples to illustrate the differences. She also discusses the requirements and potential risks of making interposed entity elections, highlighting that in some cases, they can actually limit the pool of eligible recipients for distributions.

Family Trust Election Challenges

Jonathan explains that a fixed trust with two discretionary family trusts as beneficiaries likely cannot make a family trust election due to challenges in passing the family control test and potential distribution issues. He discusses the implications for loss carry-forward if the trust cannot make a family trust election. Micaela outlines the process for revoking a family trust election, emphasizing the importance of time limits and the use of the correct form. Jonathan also clarifies that beneficiaries can loan funds to a family trust without triggering family trust distribution tax, provided certain conditions are met.

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