Submission on amendments to the Family Trust Election and related provisions
The Tax Institute (TTI) writes to you to express our serious concerns regarding the current operation of the family trust election (FTE) rules and related provisions contained in Schedule 2F to the Income Tax Assessment Act 1936 (Cth) (ITAA 1936), and their administration by the Australian Taxation Office (ATO).
In this submission, we offer several workable solutions that preserve integrity in the tax system and ensure a fair operating environment for taxpayers.
We note that we have had the benefit of reviewing the submissions on these issues made by CPA Australia on 16 July 2025 and Chartered Accountants Australia & New Zealand on 21 November 2025. The Tax Institute largely endorses the technical arguments outlined in those submissions and does not seek to re-prosecute the merits of those matters in this submission.
We note that we have engaged extensively with the ATO and the Tax Ombudsman over the past two years and have exhausted all avenues seeking administrative solutions before pursuing legislative reform. We continue to engage with the ATO and the Tax Ombudsman, however, our concerns outlined below can only be resolved through legislative reform.
Recent initiatives on tax reform and reducing red tape
On 27 June 2025, the Treasurer opened public consultation for the Economic Reform Roundtable and invited proposals and ideas for tax reform. Ministers and Members of Parliament hosted a series of roundtables and discussions with stakeholders, with a focus on increasing productivity and economic growth. In addition to the Treasurer’s Economic Reform Roundtable held from 19 August to 21 August 2025, these include the Small Business Roundtable hosted by the Minister for Small Business, the Hon. Dr Ann Aly, on 24 July 2025, and a tax reform roundtable hosted by Ms Allegra Spender MP on 25 July 2025. Australia’s tax system is ripe for reform, and it is positive to observe an increasing appetite for meaningful change.
There has also been a strong focus on reducing red tape, including within the tax system. The Treasurer tasked the Board of Taxation (the Board) with a Red Tape Reduction Review in September 2025, and we commend the Board on its consultation to date.
The Tax Institute is of the view that reforms to the FTE and family trust distribution tax (FTDT) rules fall squarely within the Government’s objectives of increasing productivity, reducing red tape and creating a fairer system for all Australians.
Executive Summary
The Tax Institute is deeply concerned that the FTDT regime is no longer operating in accordance with its original policy intent. Designed as a targeted anti-avoidance measure to prevent the transfer of trust losses to non-family members, the regime is now producing widespread and unintended consequences for a much wider group of taxpayers, most concerningly, even as a result of honest mistakes or inadvertent errors.
The Second Reading Speech accompanying the introduction of the enabling legislation stated:
The family trust distribution tax is an anti-avoidance measure designed to ensure that the tax benefit of a family trust’s losses cannot be transferred to non-family members. The government hopes the tax will never need to be paid.
[emphasis added]
While the government at the time stated that FTDT ‘need not ever be paid by any trust or interposed entity and in that sense is optional’1, we are seeing an increasing number of cases where taxpayers are finding themselves liable for FTDT for reasons inconsistent with its policy intent. The provisions apply unjustly and harshly to situations that do not involve, and have never involved, the recoupment of trust losses, passing on of franking credits, or any mischief or manipulative behaviour to avoid tax.
The effect of the provisions is punitively and disproportionately harsh, resulting in:
- unexpected FTDT and general interest charge (GIC) liabilities in the millions, and in some cases, hundreds of millions of dollars that date back many decades but which are only now being identified;
- widespread financial distress, the loss of financial security for affected private groups including family operated small businesses, and the prospect of business closure and bankruptcy and loss of jobs;
- significant professional indemnity claims relating to historical client arrangements, resulting in large claims against tax practitioners;
- the potential for tax practitioners to decline to advise clients on FTE related matters for fear of professional indemnity exposure, thereby reducing the availability of professional advice for taxpayers in a highly complex area of law; and
- resulting in some cases of double, or even triple, taxation, and enlivening other taxing regimes including franking deficit tax.
These issues are systemic and cannot be resolved through administrative action alone. Legislative reform is urgently required to restore alignment with policy intent, improve fairness, and reduce unnecessary complexity and red tape.
The Tax Institute recommends a targeted package of reforms, including:
- introducing a limited amendment period for FTDT;
- providing a legislative moratorium on ATO compliance activity relating to FTDT as an interim measure while we work towards a long-term solution;
- aligning the penalty regime with shortfall interest charge (SIC) principles;
- granting the Commissioner a discretion to address honest mistakes;
- allowing greater flexibility to vary or revoke elections; and
- simplifying compliance processes.
More broadly, the regime should be reconsidered as part of a holistic redesign, given its expansion beyond its original purpose into multiple areas of the tax system.
Timely reform will protect the integrity of the tax system while ensuring that it operates fairly, proportionately and in a manner that supports, rather than undermines, the growth and prosperity of Australian families and businesses.
Our detailed response and recommendations are contained in Appendix A.
The related annexure can be accessed here: Family Trust Elections – ATO insights and what advisers/trustees need to be aware of.