The Family Trust Election (FTE) is one of those topics that comes up in two very different contexts: at the start of a structure when an accountant suggests it, and three years later when the trust suddenly hits a problem (a denied franking credit, a trapped tax loss, a distribution to an unrelated entity) and someone asks “shouldn’t we have lodged an FTE?”

The FTE is a permanent election made by the trustee of a discretionary trust to “lock” the trust to a particular family group. Doing so unlocks several valuable tax concessions — but it permanently restricts who can benefit from the trust without triggering penalty tax. Get it right and the structure works smoothly for a generation. Get it wrong and you can pay 47% family trust distribution tax on benefits paid to the wrong people.

This guide explains what a Family Trust Election is, when it makes sense, when it doesn’t, and the trap that catches families who make one without thinking through the long-term implications. It comes from our team at Trinity Accounting Practice — a Sydney-based registered tax agent practice with 22 years advising NSW families and business owners on trust structures.

What a Family Trust Election Actually Is

A Family Trust Election is a written election lodged with the ATO by the trustee of a discretionary trust. It nominates a single “test individual” (sometimes called the “specified individual”) and effectively defines a “family group” around that person — typically their spouse, children, parents, siblings, in-laws and certain related entities.

Once the FTE is made:

Distributions of trust income or capital to anyone outside the defined family group will attract family trust distribution tax at the top marginal rate (currently 47% including Medicare levy).
The trust gains access to several tax concessions not available to non-electing discretionary trusts (detailed below).
The election is generally irrevocable from the start of the income year in which it is made.

The Concessions an FTE Unlocks

Three meaningful concessions:

Franking credit access (the 45-day holding rule). Without an FTE, the 45-day holding rule can deny franking credits on shares held by the trust. With an FTE, beneficiaries within the family group can generally access franking credits attached to dividends distributed by the trust.
Trust loss carry-forward. The “trust loss” rules (Schedule 2F of the Income Tax Assessment Act) restrict a discretionary trust’s ability to carry forward and use prior-year tax losses. An FTE relaxes some of these tests, making it easier for the trust to use accumulated losses.
Company loss tracing. Where the trust owns shares in a company, an FTE simplifies the tracing of shareholding for the company’s own loss-recoupment tests.

The first one — franking credits — is the most common practical driver. A family trust holding ASX-listed shares that pays out fully franked dividends through to family beneficiaries usually wants the FTE in place.

The Cost — What You’re Giving Up

The trade-off is real and permanent:

You cannot distribute outside the family group without attracting 47% family trust distribution tax. Forever.
“Family group” has a strict statutory definition. Long-term partners who are not married or de facto, close friends, business associates — none of them are in the family group, even if they are like family.
The test individual can be changed only once. If the original test individual passes away or the family dynamic changes substantially, there is limited flexibility.
Distributions to a private company beneficiary (a “bucket company”) only avoid family trust distribution tax if that company is within the defined family group — typically because all its shareholders are family members.

When an FTE Makes Sense

An FTE is usually the right call when:

The trust holds ASX-listed shares generating franked dividend income that will flow through to family beneficiaries.
The trust has accumulated tax losses that would otherwise be hard to use under the trust loss rules.
The intended beneficiaries are all within the family group — and likely to stay that way.
The trust is part of a multi-entity family group where simpler loss tracing is valuable.

When an FTE Does NOT Make Sense

The trust is intended to benefit beneficiaries outside a single family — e.g., a trust for unrelated business partners, or a charitable purpose trust.
The trust holds active business income only (no portfolio shares with franking credits) and has no losses.
You are unsure who the long-term beneficiaries will be and want flexibility — the FTE removes that flexibility.
You are using the trust for asset protection and the discretionary nature of distributions is part of the structure.

The Mechanics — How an FTE Is Made

The election is made on the trust’s income tax return for the year in which the election first takes effect. It is a specific election form within the return — not a separate filing — and it requires:

The trustee’s identification and signature.
The “test individual” — usually the matriarch or patriarch of the family.
The income year from which the election applies.
Trust deed compatibility — the trust deed must allow the election. Some older deeds have wording that conflicts; check before electing.

Once lodged, the election applies retrospectively to the start of the income year and is generally irrevocable.

The Interposed Entity Election (IEE) — Related But Different

If a company or another trust is a beneficiary of the family trust and you want it to be inside the family group, that entity itself must make an Interposed Entity Election nominating the same test individual. Without an IEE, distributions to a private company bucket can still attract family trust distribution tax even though the company is “owned by family.” This is a common structural error.

A Trinity insight from 22 years in practice

The most expensive FTE mistake we have helped a family unwind involved a successful Sydney family business where one of the founder’s daughters had married into another family and her father-in-law had become a casual director of an associated company. A routine distribution to that company triggered family trust distribution tax of over $200,000 because the company hadn’t made an Interposed Entity Election with the right test individual nominated. The rules are technical and unforgiving. Don’t make an FTE without a full review of the family group, the related entities, and the trust deed wording.

What This Means for You

If you have a discretionary trust that holds shares: ask whether an FTE has been made and whether it should be. The default answer is often yes — but only after a structure review.
If you’re setting up a new trust: don’t make the FTE on day one. Wait until you understand who the trust will actually distribute to, then elect at the right time.
If you have a trust with related-entity beneficiaries: check whether each of those entities has lodged its own Interposed Entity Election.

How Trinity Can Help

Trinity Accounting Practice advises NSW families and business owners on trust structures, family trust elections, interposed entity elections and the broader tax structure decisions that surround them. As a registered tax agent firm with 22 years of NSW small business and family wealth experience, we can review your existing trust structure, model the FTE decision, and lodge the election (or the associated IEE) through the proper channel.

Book a free 30-minute family trust structure review with the Trinity team →

General advice only. This article contains general information current as at May 2026 and does not constitute tax, financial, structuring or legal advice. Trust law and family trust election rules are technical and unforgiving. It does not take into account your personal circumstances, objectives, or needs. Before making or unwinding a Family Trust Election, you should seek qualified tax and legal advice from Trinity Accounting Practice or another qualified adviser.