Update from the ATO

On 28 August 2025, the ATO published an update about how it is responding to the increasing number of Family Trust Distribution Tax (FTDT) cases.

The update included various risk areas that the ATO has identified, including ways that it’s improving how family trust elections (FTE) and interposed entity elections (IEE) are managed.

The ATO says that the increase in FTDT cases has been due to inadequate record-keeping, intergenerational expansion of businesses, the evolution of private groups and a lack of understanding about the future consequences and limitations that FTEs and IEEs can have on private groups over time. Further, the ATO says that FTDT is a “self-executing tax”, meaning that it has no administrative powers to ignore the application of the tax, including where it arises because of a genuine mistake or where there’s no tax mischief. The ATO also has no or limited powers to allow elections to be varied or revoked, or otherwise allow a trustee’s distribution decision to be reversed. The ATO, therefore, recommends that clients and their advisors review their elections annually.

FTE and IEE forms have also been updated to clarify that a public officer or a director of a corporate trustee can sign the form itself. All elections should now also display on Online Services for registered tax agents.

What we are seeing

We are identifying various issues being targeted by the ATO because of the way FTEs and IEEs operate.

These include:

• the definition of the “family” and the “family group” for tax purposes not necessarily aligning to the modern concept of a “family” and how that is understood in a social or familial setting;
• the definition of a “distribution” for tax purposes being substantially broader than merely a trust distribution. For example, it also includes the provision of loans and crediting of other property to a person;
• the discovery of FTDT liabilities decades after they have arisen, causing substantial interest charges owing to the ATO. The ATO has tried to alleviate such charges by remitting interest by 80% or potentially more in certain cases;
• changing the requirements for making and backdating elections, including under old administrative practices dating back to 2004;
• the ATO requiring evidence of elections decades after the elections were made, and which are well outside the ordinary document retention period; and
• advisors inadvertently attempting to make elections for entities, and treating entities as part of a family group, even where the entity does not pass the family control test.

We recommend…

In the current environment, we strongly recommend that clients and their advisors revisit current and historical trust arrangements that could result in the imposition of FTDT and interest.

Where potential liabilities are discovered because of distributions made to the “outsiders of the family group”, it is prudent to consider how the law applied as far back as 1995 as certain discretions and concessions were available which could reduce or eliminate the FTDT liability altogether.

If you have any concerns with current or historical arrangements that may result in FTDT, or you think you need assistance preparing for an ATO engagement, please contact us. HWLE’s national tax group has extensive experience managing FTDT risk, including engaging with the ATO in reviews and audits.

This article was written by Vincent Licciardi, Partner and Eric Lay, Solicitor.