This is Part 3 of our series of articles on key issues relating to family trust elections (FTEs) and interposed entity elections (IEEs). In this article, we examine the meaning of ‘distribution’ for the purposes of the relevant provisions of Schedule 2F of the Income Tax Assessment Act 1936 (Cth) (ITAA 1936).
Distributions made outside of the relevant family group by an entity that has made an election can give rise to family trust distribution tax (FTDT) of 47% on the amount or value of the distribution of income or capital. This is particularly harsh if capital contributed from after tax moneys to an entity is subjected to a further 47% tax.
Accordingly, it is vital that trustees of family trusts and other entities that have made elections (eg, a company owned, in whole or part, by a family trust that has made an IEE) and their advisers understand what actions are caught as a distribution so as not to enliven FTDT.
References to legislation are references to Schedule 2F of the ITAA 1936 unless stated otherwise.
Parts 1 and 2 of this series are available under the ‘Related Articles’ heading below, which provide a general overview of FTEs and IEEs respectively.
For our recent webinar on FTEs and IEEs, click here.
The meaning of ‘distribution’ — a legislative overview
Subdivision 272-B outlines when an entity (ie, a trust, partnership or company) distributes income or capital. For the purposes of this article, we are considering distributions from a trust rather than those from a company or partnership, which have their own separate definitions of distributions under s 272-50 and s 272-55 respectively. Section 272-45 specifically deals with distributions from a trust to a beneficiary of that trust and provides:
A trust distributes income or capital of the trust to a person if it:
(a) pays or credits the income or capital in the form of money to the person; or
(b) transfers the income or capital in the form of property to the person; or
(c) reinvests or otherwise deals with the income or capital on behalf of the person or in accordance with the directions of the person; or
(d) applies the income or capital for the benefit of the person;
in the person’s capacity as a beneficiary of the trust.
The above primary definition of ‘distributes’ is further expanded by s 272-60, which deals with other distributions of income and capital by an entity and provides:
(1) A company, partnership or trust (an entity) also distributes income or capital to a person in circumstances not covered by section 272-45, 272-50 or 272-55 if it:
(a) pays (including by way of a loan) or credits money of the entity to the person, or reinvests such money for the person; or
(b) transfers property of the entity to, or allows use of property of the entity by, the person; or
(c) deals with money or property of the entity for or on behalf of the person or as the person directs; or
(d) applies money or property of the entity for the benefit of the person; or
(e) extinguishes, forgives, releases or waives a debt or other liability owed by the person to the entity.
(2) However, subsection (1) only applies if, and to the extent that:
(a) the amount paid, credited, reinvested or applied, the value of the property transferred, or the value of the other thing done;
exceeds:
(b) the amount or value of any consideration given in return.
Notably, in addition to widening the potential actions that give rise to a distribution, the ATO considers that the expanded definition captures distributions from a trust to a person whether or not that person is a beneficiary of the trust. However, subsection 2 clarifies that it is only to the extent that the amount or value of the distribution exceeds the consideration provided in return that a distribution will arise for the purposes of Schedule 2F.
ATO position
In Taxation Determination (TD) 2017/20, the Commissioner takes a broad view of what constitutes a trust distribution for the purposes of assessing FTDT. Where the benefit conferred by the trust exceeds any consideration received in return, the trust will be taken to have made a distribution for FTDT.
Holiday Homes
Example 5 of TD 2017/20 highlights how broad the Commissioner’s interpretation of a distribution can be in respect of a holiday home (HH) owned by a family trust that has made an FTE:
The Wonder Family Trust has made an FTE and Diana Prince is the specified individual. The trust owns a holiday home. The holiday home is used by Diana’s friends, for no consideration, for four weeks in the year.
This transaction is not on arm’s length terms nor an ordinary incident of a business being carried on by the trust. As no consideration is given in return for the use of the property, the full value of that use is a distribution within the extended meaning of ‘distributes’.
Accordingly, trustees of family trusts that hold a HH in the trust should carefully consider whether they have made or intend on making an FTE as the use of the HH by persons outside of the family group for nil consideration can give rise to FTDT. Further, in Victoria a HH in a trust will only be eligible to qualify for a HH exemption for vacant residential land tax (VRLT) purposes if the HH was acquired by the family trust prior to 28 November 2023.
Limitations on distributions
In relation to the limitation on distributions contained in s 272-60(2) regarding any consideration given in return for a distribution, paragraph 19 of TD 2017/20 clarifies that the Commissioner considers this limitation is designed to ensure that genuine commercial dealings do not inappropriately give rise to a liability to pay FTDT. Notably, paragraph 20 of TD 2017/20 provides:
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- The amount or value of consideration given for a distribution transaction is a question of fact. However, in practice the Commissioner will infer that the amount or value of a benefit provided to a person does not exceed the amount or value of consideration given in return where the relevant transaction:
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- occurs on arm’s length terms, and
- is an ordinary incident of a business being carried on by the trust.
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Thus, it is vital that, where a trust is carrying on a business, any dealings with respect of that business occur on arm’s length terms and evidence of this is obtained. Otherwise, for example, a business carried on in a trust that forgives or writes off a debt owing by an outsider to the family group would have to pay 47% FTDT on the amount forgiven or written-off.
Conclusion
Trustees and their advisers must ensure that they carefully manage trust distributions so as not to enliven FTDT and other relevant tax provisions. The use of trust property as well as non-arm’s length dealings between a trust and outsiders of the family group can inadvertently give rise to FTDT. Naturally, if requested, DBA Lawyers would be pleased to help. We offer a wide range of trust advice and related services, which can be viewed at the following webpage: https://www.dbalawyers.com.au/trusts-advice/.
Related articles
- Family trust elections – one choice, lasting consequences – Part 1
- Family trust elections — interposed entity elections and revocations — Part 2
- Why should you order trusts from DBA Lawyers?
- Does your trust deed have appropriate income characterisation and streaming powers?
- Family trusts –– managing unpaid present entitlements
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This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional. The above does not constitute financial product advice. Financial product advice can only be obtained from a licenced financial adviser under the Corporations Act 2001 (Cth).
Note: DBA Lawyers presents monthly online SMSF training. For more details or to register, visit www.dbanetwork.com.au or call 03 9092 9400.
For more information regarding how DBA Lawyers can assist in your SMSF practice, visit www.dbalawyers.com.au.
By Daniel Butler, Director ([email protected]) and Fraser Stead, Lawyer ([email protected]).
DBA LAWYERS
27 February 2026
