This is Part 2 of our series of articles on key issues relating to family trust elections (FTEs) and interposed entity elections (IEEs). Part 1 provided a general overview of FTEs, the family group and the ATO’s recent increased focus in this area. In this article, we examine IEEs, revoking an election and lost election documentation.
Unless otherwise stated, all references are to Schedule 2F of the Income Tax Assessment Act 1936 (Cth) (ITAA 1936).
To read part 1 of this series, click here.
For our recent webinar on FTEs and IEEs, click here.
What is an IEE?
An IEE is an election made by a trust, partnership or company (ie, an entity) under s 272-85 to become part of a family group of the individual specified in an FTE for the purpose of allowing the entity to make and receive distributions from other family entities that fall within that same family group. By making an IEE, the entity is included in the family group of the primary individual specified in an FTE made by an FT from the income year specified in the IEE.
Example:
The trustee of the Smith Family Trust makes an FTE with John Smith as the primary individual. If another trust wishes to be included in the Smith family group (eg, the Smith Family Trust No 2), the trustee could make an IEE to be included in the same family group of John Smith. Alternatively, the trustee of the Smith Family Trust No 2 could make an FTE with John Smith as the primary individual specified in the election for the No 2 trust. Naturally, the relevant requirements for each kind of election, such as the family control test, must be satisfied at the relevant time for a valid election to take place.
Once an entity has made an IEE, distributions that the entity makes outside of the relevant family group will give rise to family trust distribution tax (FTDT) of 47%. For example, if a corporate beneficiary makes an IEE in respect of an FT that has made an FTE, any distributions by that company outside the relevant family group will be subject to FTDT. The ATO can collect FTDT and GIC for prior matters indefinitely and is not precluded under the usual 4-year limit that applies to varying an income tax assessment.
The entity making an IEE must also satisfy the family control test at the end of the relevant income year specified in the election for a valid election to occur. In broad terms, to satisfy the family control test under s 272-87:
- the primary individual, members of their family or trustees of FTs that have made an FTE with the same primary individual must have (between them), directly or indirectly, and for their own benefit, fixed entitlements to a greater than 50% share of the income or capital of the trust, company or partnership; and
- in relation to a trust, the group must be in a position to control the trust and control is broadly defined in s 272-87(2) for these purposes.
Issues can arise from the family control test being tested at the end of a financial year so care is needed in the year an entity makes an election. Unlike an FTE, however, the primary individual specified in the IEE does not have to be alive at the time the IEE is made.
Revocation
FTEs and IEEs can only be revoked in the limited circumstances set out in s 272-80 and
s 272-85, respectively. Generally, a revocation must occur prior to the end of the fourth income year after the income year that was specified in the original election. Accordingly, many prior FTEs and IEEs cannot be revoked and distributions must be carefully managed to avoid FTDT.
Broadly, an FTE can only be revoked within the 4-year period where the trust has not offset a tax loss (on revenue account), has not claimed certain debt deductions nor accessed any franking credits. There are also restrictions imposed on revoking an IEE. However, where an FTE is revoked, any related IEEs are also taken to be revoked.
Given the difficulty in revoking an FTE or IEE, trustees and advisers must carefully consider whether an election should be made in the first place.
Naturally, it is best practice for advisers to provide clients with appropriate written guidance on making an election given the importance of this decision and the significant risks that follow from making an election; such as FTDT and general interest charge (GIC) where a payment is made to an outsider of the family group.
GIC is not deductible after 1 July 2025 and in some cases, due to the long period that has passed since a distribution was made to an outsider, the GIC can be considerably greater than the amount of FTDT (doubling in amount over a period of around 7 years).
Conversely, there are significant potential lost opportunities if an election is not made at the appropriate time, such as loss of tax losses (on revenue account), certain debt deductions and accessing franking credits.
Lost or uncertain documentation
Where the original FTE or IEE documentation is lost or there are multiple conflicting elections in place, there may be uncertainty in relation to who the relevant primary individual is for determining the family group that is eligible to receive distributions. Although details regarding prior FTEs and IEEs may be available on the ATO portal, this information is not a reliable substitute for the original documentation. We are also aware of certain FTs that have made multiple elections and this has generally occurred when there has been a prior change in advisers.
Naturally, clients and advisers should endeavour to compile an accurate summary of the family group and document which entities have made what elections and who have been specified as the primary individuals in each election. This documented summary should also provide details of which entities are within the family group. This summary should prove useful when a determination is made prior to each 30 June in relation to distributions to beneficiaries.
Advisers onboarding new clients should ensure they do sufficient due diligence and checking to establish what the election status of each trust, company or partnership is as failing to get this right could lead to considerable downside FTDT and GIC risk.
Conclusion
Where an FTE or IEE has been made, there are restrictions on who can receive distributions without paying FTDT and GIC. Accordingly, trustees and their advisers must carefully review which individuals and entities are within the family group so as not to enliven FTDT and GIC.
Naturally, if requested, DBA Lawyers would be pleased to provide assistance. 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/. In particular, we can review trust deeds, prior elections and the entities within a particular family group and advise and document the summary needed to minimise FTDT and GIC exposure in the future.
Related articles
- Family trust elections – one choice, lasting consequences – Part 1
- ATO checklist for trust distributions
- Why should you order trusts from DBA Lawyers?
- Does your trust deed have appropriate income characterisation and streaming powers?
- Is your discretionary trust still discretionary? Case law developments on trustee duties
- Family trusts –– managing unpaid present entitlements
* * *
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
29 January 2026
