A family trust in Australia does not pay income tax at the trust level in most circumstances. Instead the trustee decides who receives the income and capital gains each financial year and those beneficiaries pay tax on their share at their own marginal rates. When a trustee makes a Family Trust Election the trust can unlock loss concessions but it must restrict distributions to a defined family group. If the trustee breaks that rule or fails to make a valid distribution the Australian Taxation Office can impose Family Trust Distribution Tax at a flat 47 per cent plus General Interest Charge. Understanding how these moving parts interact is essential for anyone who wants to run a compliant and tax-efficient family trust in 2026 and beyond.
What a Family Trust Looks Like in 2026
A family trust is a discretionary trust that has made a Family Trust Election with the Australian Taxation Office. The election fixes one individual as the test person and treats that person’s relatives and certain entities they control as the family group. Once the election is in place the trustee gains access to special rules that allow carry forward of trust losses and company franking credits. The price for these concessions is strict policing of who can receive trust income. Any distribution outside the family group triggers Family Trust Distribution Tax.
Family trusts remain popular for three main reasons. They give the controller flexibility to stream different classes of income each year. They allow families to protect assets from outside claims because beneficiaries have no fixed entitlement until the trustee decides. They also let families legitimately spread income across relatives on lower marginal rates which lowers the overall household tax bill as long as the trust rules are followed.
A standard family trust structure therefore involves four layers. The settlor who contributes the initial amount to create the trust. The trustee who holds legal title to the trust assets. The beneficiaries whose eligibility is described in the deed. Finally the appointor or guardian who has the power to hire or sack the trustee. A corporate trustee is common in 2026 because it limits personal liability and can continue indefinitely.
How Income Flows Through a Family Trust
Income earned by a family trust keeps its character as it moves to beneficiaries. Franked dividends retain their franking credits. Capital gains retain eligibility for the 50 per cent general discount if the asset was held more than twelve months. Primary production income can pass through averaging concessions.
At the end of each financial year the trustee writes a distribution resolution. The deed usually requires the decision by 30 June so timing is critical. The resolution can allocate percentages or fixed dollar amounts. Once the clock hits midnight the beneficiaries become presently entitled to their share even if no cash actually changes hands that night.
The trust itself then lodges an income tax return in which it reports total net income and how it has been distributed. If the trustee validly distributes all the income the trust pays no tax. Each beneficiary declares their share in their own return.
The following table sets out how Australian resident individual marginal rates in the 2025 to 2026 income year compare with the flat Family Trust Distribution Tax rate.
| Taxable income | Marginal rate 2025-26 | FTDT on same slice |
|---|---|---|
| 0 to 18,200 | 0 percent | 47 percent |
| 18,201 to 45,000 | 19 percent | 47 percent |
| 45,001 to 120,000 | 30 percent | 47 percent |
| 120,001 to 180,000 | 37 percent | 47 percent |
| Above 180,000 | 45 percent | 47 percent |
The comparison highlights why a correct distribution is vital. In most bands the gap between ordinary tax and the penalty represents tens of thousands of dollars.
Family Trust Election The Gatekeeper Rule
Making a Family Trust Election is voluntary. The trustee or the director of a corporate trustee completes the short ATO form, specifies a test individual and the election then applies from the start of the income year in which it is lodged unless backdating rules apply. Once made the election is almost impossible to revoke. The trust can only vary the family group by adopting an interposed entity election for companies and trusts that it controls.
The benefit of an election is clear. Without it the trust will generally forfeit prior year losses once the pattern of control or income changes. That downside often outweighs the flexibility of not having family group boundaries. For ongoing businesses with fluctuating income streams the election secures the ability to offset future profits against early stage losses.
The trade-off is the gatekeeper rule. If any distribution falls outside the family group then FTDT applies to the trustee. Even if the trustee had no intention to avoid tax ignorance is not a defence. The ATO’s 2025 compliance program singled out trusts that streamed franked dividends to corporate beneficiaries that were not covered by an interposed entity election. The director penalty regime can also make directors personally liable where a corporate trustee fails to pay FTDT.
Understanding the Family Trust Distribution Tax Penalty
Family Trust Distribution Tax is a separate tax collected from trustees under Schedule 2F of the Income Tax Assessment Act 1936. The headline rate is 47 per cent which lines up with the top personal marginal rate plus Medicare levy. The idea is to remove any financial incentive to distribute outside the family group.
FTDT is payable when the trustee either distributes income or capital to an outsider or makes an outsider presently entitled by default. Outsiders include in-laws, non-resident relatives, unrelated companies or trusts and sometimes charities if not listed as members of the family group.
The due date is the twenty first day of the month following the month in which the distribution occurred. Payment after that date attracts General Interest Charge. The ATO publishes the GIC rate quarterly and it compounds daily. In the September 2025 quarter the annualised GIC sat at 11.15 per cent which makes late FTDT extremely expensive.
Australia’s Parliament amended the law in June 2025 to give the Commissioner a limited power to remit up to eighty per cent of accrued GIC on unpaid FTDT where the trustee voluntarily discloses the breach by 30 June 2026. The concession operates on a sliding scale so early disclosure can save significant sums.
The following table shows how GIC can inflate a 100,000 FTDT liability if left unpaid for five years at an average annual rate of eleven per cent.
| Year end balance | Principal FTDT | Accrued GIC | Total debt |
|---|---|---|---|
| Day one | 100,000 | 0 | 100,000 |
| After one year | 100,000 | 11,000 | 111,000 |
| After three years | 100,000 | 38,000 | 138,000 |
| After five years | 100,000 | 69,000 | 169,000 |
A trustee who qualifies for eighty per cent remission after five years could see the GIC component fall from 69,000 to 13,800. Even so the lesson is clear. Prevention is better than cure.
Worked Example Seeing the Numbers
Assume the Green Family Trust earns 250,000 of business profit and 20,000 of franked dividends in 2025-26. The trustee wants to retain flexibility to use prior year losses, so it has a Family Trust Election in force. The test individual is Alex Green. The beneficiaries are Alex, spouse Jordan and their adult children Riley and Casey.
On 30 June 2026 the trustee resolves to distribute 100,000 to Jordan, 100,000 to Riley who recently finished university, and the balance of 70,000 to Alex. No separate streaming of franked dividends is made so each person receives their share of the income pool proportional to their entitlement.
Jordan’s marginal tax on 100,000 is 22,000 plus Medicare. Riley qualifies for the low income offset so pays roughly 11,000. Alex who is already on a high salary pays 33,600 in tax on the 70,000 share. The total family tax on the trust income is therefore about 66,600.
If instead the trustee had failed to draft the resolution in time the trust income would be assessed to the trustee at the top rate. Tax on 270,000 at 47 percent is 126,900. The timing error would therefore cost the family about 60,000 in extra tax.
A more extreme outcome applies if the trustee distributes 20,000 to Alex’s cousin Sam who is not within the family group. The trust triggers FTDT of 9,400 on that slice. Sam still has to declare the 20,000 in Sam’s own tax return. The same money is therefore taxed twice.
Key Deadlines and 2026 Updates
Trusts with a tax agent can lodge their 2026 return by 15 May 2027 for most cases. Trustees without an agent must lodge by 31 October 2026. The payment date aligns with the lodgement due date unless the trust had unpaid tax in a prior year.
Distribution resolutions must still be completed by 30 June each year unless the deed sets an even earlier date. The ATO accepts electronic minutes if kept in a secure file.
The 2025 legislation also tightened the rules around unpaid present entitlements owed by trusts to related private companies known as Division 7A loans. From 1 July 2026 those loans will need to be put on a complying loan agreement by the company’s lodgement day or the amount will be deemed a dividend. Compliance now directly affects family trusts that rely on corporate beneficiaries to cap tax at the thirty per cent company rate.
Finally the Stage Three personal tax cuts will commence on 1 July 2027 under current law. The thirty per cent rate will apply to incomes up to 190,000. That makes the thirty per cent company rate less attractive and increases the importance of well managed family trust distributions across multiple adult relatives.
Common Mistakes Trustees Make
The most frequent error remains failure to record a valid distribution resolution. Verbal intentions do not count. Secondary mistakes involve streaming franked dividends to family companies without an interposed entity election. Trustees also confuse the family group rules by distributing to new in-laws without updating the deed or making an interposed election.
Another trap is carrying forward capital losses without a Family Trust Election in place. The losses can be wiped entirely if the pattern of control changes or a new beneficiary receives income.
The ATO reports that forty per cent of trusts examined in its 2025 Private Wealth Focus Program had arithmetic errors in beneficiary statements. Misallocating franking credits was the chief culprit. Many trustees still rely on spreadsheets rather than specialist software.
Advanced Distribution and Loss Strategies for 2026 and Beyond
Families with private companies can channel preference share dividends through the trust to franked dividend beneficiaries. However the benefit only arises if the trust has distributed all net income for tax purposes. The 2024 full Federal Court decision in Guardian AIT confirms some flexibility in directing gains to low rate entities but the Commissioner will review any patterns that artificially divert capital gains away from the true economic owners.
Losses from negative gearing inside a trust can be stored and unleashed once children turn eighteen. A Family Trust Election ensures those losses survive until the first profitable year. Similarly franking credits trapped in a loss year can be accessed in future years if the trust passes the holding period rule and makes the election.
Trustees with large unrealised gains should review the discounted capital gains concession. Selling after the beneficiary graduates or retires can halve the effective rate thanks to the fifty per cent discount and a lower marginal bracket. Timing sales across two financial years can double the tax free threshold.
From 1 July 2026 trustees should also watch the corporate beneficiary loan rules. Converting unpaid present entitlements into compliant Division 7A loans before the deadline avoids deemed dividends. Setting up a dividend access share arrangement can then soak up the franking credits inside the company. Each step must satisfy the general anti avoidance rule so professional advice is essential.
Frequently Asked Questions
What is the quickest way to check if my trust has a Family Trust Election
Log in to Online services for business and view the trust profile. The election date and test individual will appear. Your tax agent can also request a copy of the election notice from the ATO.
Can I revoke a Family Trust Election if my family circumstances change
Revocation is only possible if the election was made by mistake or the trust is wound up. The ATO interprets mistake very narrowly. In practical terms assume the election is permanent.
Who falls inside the family group for distribution purposes
The group includes the test individual, their spouse, children, grandchildren, siblings, parents, grandparents, nieces and nephews. Entities that they control can be brought in by an interposed entity election. In laws, cousins beyond nieces and nephews, and discretionary trusts of relatives sit outside by default.
How do I calculate General Interest Charge on unpaid Family Trust Distribution Tax
Multiply the outstanding FTDT by the daily GIC rate which is the published quarterly rate divided by the number of days in the year. Apply the result each day to the increasing balance using compound interest. Online calculators can automate the task.
Is Family Trust Distribution Tax deductible against trust income
No. FTDT is a penalty tax payable by the trustee. Section 51-5 of the Income Tax Assessment Act 1997 expressly denies a deduction for penalties or fines under an Australian law.
Does a family trust pay Medicare levy
Beneficiaries pay Medicare levy on distributions because the trust does not pay tax itself. If a distribution goes to a private company the levy does not apply to that company but any subsequent flows to individual shareholders will carry the levy as usual.
How does a family trust compare with a unit trust for tax
A unit trust has fixed entitlements. Each unitholder is taxed on their share regardless of trustee discretion. A family trust provides flexibility to change distributions each year but faces Family Trust Election and FTDT rules. For passive investments with unrelated owners a unit trust often suits better. For families seeking income streaming a discretionary family trust usually wins.
The Bottom Line for Trustees
Running a family trust in Australia offers unrivalled flexibility and tax planning power when executed correctly. The trustee must master three core obligations. First prepare a valid distribution resolution by 30 June. Second ensure every beneficiary falls within the family group once a Family Trust Election is in place. Third pay close attention to reporting dates to avoid General Interest Charge. With those pillars in place families can use trusts to accumulate wealth, protect assets and legitimately share income across generations well into the post 2026 landscape.
