Why family trust tax reform can’t wait

Jenny Wong

The article is relevant to members in Australia and was current at the time of publication.

A recent Federal Court case has shone a harsh light on just how unforgiving our tax system can be when it comes to family trusts.

The Thomas family, owners of one of Australia’s largest private agribusinesses, is fighting a A$13.2 million family trust distribution tax (FTDT) bill, because of a paperwork error made years ago in a family trust election.

Family trust elections were introduced in the late 1990s as an anti-avoidance measure, designed to ensure tax benefits stayed within a defined “family group”. 

But more than two decades later, these rules have become a minefield. One incorrect name, a missing form, or an election lodged without full historical records can trigger FTDT at 47 per cent.

The wrong ‘test individual’

That is exactly what happened to the Thomases. Their accountants inadvertently nominated the wrong family member as the “test individual”, which meant that when money moved between two trusts, it was treated as if it had flowed outside the family group. The Australian Taxation Office (ATO) had no discretion to correct or waive the resulting FTDT, so the only option was to go to court.

At CPA Australia, we have heard too many stories like this from members, accountants advising family businesses, farmers, tradies and small operators, who are discovering historic family trust election errors stretching back decades.

In some cases, these errors are only now being picked up, with interest compounding daily. A A$400,000 FTDT liability from 2004 could now exceed A$5 million. For many family businesses, that is the difference between keeping the doors open and financial ruin.

The system is simply not fit for purpose. Family trust elections are irrevocable and inflexible, and the ATO’s records have not always been complete or accessible to taxpayers or their advisers. Even diligent professionals can be caught out. 

That is why CPA Australia is calling for urgent reform. We have recommended to Treasury that the law be updated to allow genuine errors to be corrected.

CPA Australia also welcomes the Taxation Ombudsman’s decision to review the administrative aspects of these family trust provisions.

Family trusts play a vital role in Australian business and succession planning, but when technical errors can destroy livelihoods, something has gone wrong. The law needs to keep pace with how families run their businesses and ensure that our taxation system punishes deliberate evasion, not honest mistakes.

Jenny Wong is CPA Australia’s Tax Lead