Update from the ATO on Family Trust Distribution Tax and General Interest Charge

What is Family Trust Distribution Tax?

The Australian Taxation Office (ATO) has provided a significant update on its approach to the general interest charge (GIC) applied to unpaid family trust distribution tax (FTDT). This development presents a limited window of opportunity for trustees to review their positions and mitigate potentially substantial liabilities.

The FTDT a 47% penalty tax applied when a trust, which has made a Family Trust Election (FTE), distributes income or capital outside the defined ‘family group’ of the ‘specified individual’ in that election. The application of FTDT is automatic and absolute. The Commissioner of Taxation has no administrative discretion to waive or reduce the tax. All FTDT liabilities are subject to collection in full, regardless of when the distribution occurred, even if it falls outside standard amendment periods.

The definition of a ‘distribution’ in the context of FTDT is broad. It extends beyond typical year-end income distributions to include any transfer of trust assets to someone outside the family group. This can encompass money, property, loans, advances, and even unpaid present entitlements, all of which can trigger an FTDT liability.

Distributions that trigger FTDT can occur from simple human error, oversight or as an unintended by-product from:

• A significant life event such as a family breakdown, divorce or the death of the specified individual
• Restructures, entity disposals or mishaps from succession or estate planning
• Poor record management of FTE’s and/or interposed entity elections (IEE’s) and outdated beneficiary registers

An FTDT liability is payable by the trustee within 21 days of the distribution. If it remains unpaid for more than 60 days, the GIC begins to accrue. Because standard amendment periods do not limit the collection of FTDT, the GIC on an old, unpaid liability can accumulate into a substantial sum over many years.

Example of FTDT and GIC Liability

Mr Smith is the specified individual of the Smith Family Trust with an FTE in place since 1 July 2007. On 1 July 2010 the Trustee of the Smith Family Trust made a distribution of $100,000 to his uncle, Mr Relative who is not within the family group. Mr Clean was appointed as Tax Agent of the Smith Family Trust on 1 July 2025 and after a review of historical data, the distribution made to Mr Relative was identified. Mr Clean discussed the tax implications of this distribution with Mr Smith and calculated the tax impact of the distribution to be:

Outstanding FTDT liability = $47,000
GIC over a 15-year period (using ATO published quarterly rates) = $180,000 (approx.)
Total due and payable to the ATO on 1 July 2025 = $227,000

The ATO’s New Stance on GIC Remission

Private Wealth Assistant Commissioner, Amy James-Velagic, recently provided an update on the ATO’s approach to remit GIC on unpaid FTDT arising from a distribution being made outside the family group. Where an ‘electing entity’ has taken reasonable steps to mitigate the effects of those circumstances up to 31 December 2026, GIC may be remitted.

For remission to be considered, the electing entity would need to provide the ATO with a GIC remission request inclusive of sufficient information for case officers to consider whether the request is ‘fair and reasonable’. The ATO has clearly stated a request would not generally be considered fair and reasonable in the following circumstances:

• A risk review identifying FTDT risks has progressed to an audit
• The ATO have issued a FTDT notice to the electing entity
• There is evidence of mischief, tax avoidance, fraud or evasion

Further guidance on the ATO’s approach to remission of GIC can be found in PS LA 2011/12.

Where the ATO considers an electing entity has taken reasonable steps to mitigate their FTDT risks, the ATO may consider it fair and reasonable to remit GIC as follows:

• 80% remission (20% of GIC liability remaining) where a taxpayer has:
  • Proactively self-reviewed their FTDT liability before the ATO starts a review
  • Lodged the FTDT payment advice form (NAT 6175)
  • Paid the FTDT in full
• Partial remission (less than 80%) where a taxpayer has:
  • Made a voluntary disclosure of an FTDT liability early in a review (prior to audit)
  • Lodged the ftdt payment advice form (nat 6175)
  • Paid the FTDT

Proactive Governance is Key

The most effective way to prevent FTDT issues is through strong tax governance. This includes maintaining accurate records of all elections, clearly documenting the specified individual, and defining which entities are inside and outside the family group. The ATO advises taxpayers to manage their FTDT risks by conducting annual reviews of their elections, assessing the ongoing consequences, and documenting all decisions as they are made.

Private groups should prioritise a review of their FTDT risk exposure before the 31 December 2026 deadline. Given the ATO’s increased focus on debt collection and recent law changes that deny income tax deductions for GIC, it is unlikely that similar leniency will be offered in the future. We can assist your organisation in undertaking a comprehensive review to identify and mitigate any potential FTDT liabilities.