Our family trust paid someone outside the family group — what is family trust distribution tax, and can the interest still be cut?

The trust was set up years ago, the accountant at the time ticked the family trust election box because it helped with franking credits, and nobody has thought about it since. Meanwhile the family has grown: a child now runs their own trust, a cousin was helped out with a loan, a long-time manager was given a few shares in the family company. None of that felt like a tax event.

Under the family trust rules, any of it can be. And the ATO has put a date on the cheapest way to deal with it: 31 December 2026.

What family trust distribution tax is

A family trust election (FTE) is a choice a trustee makes so the trust is treated as a 'family trust' for tax purposes — having 'family trust' in the name isn't enough. It unlocks concessions around trust losses, franking credits and some reporting rules. The trade-off is that the election names one person, the specified individual, and from then on the trust is expected to keep its distributions inside that person's 'family group'.

When it doesn't, family trust distribution tax (FTDT) applies. The ATO's family trusts page (updated 24 June 2026) sets the rate at the top individual marginal rate plus Medicare levy — currently 47% — on the amount or value of what went outside the group. It is payable by the trustee, and for companies the directors are jointly and severally liable. The same applies to a company, partnership or trust that made an interposed entity election (IEE) to join the family group.

Three details make it more serious than it sounds. FTDT is generally due 21 days after the distribution, whenever it is discovered. General interest charge (GIC) starts accruing 60 days after that due date. And the ATO says there is no time limit on issuing an FTDT notice, that it has no discretion to ignore FTDT it identifies, and that it cannot limit the period FTDT applies to. The ATO's own worked examples warn that when the problem surfaces years later, the GIC can end up larger than the tax.

Who is — and isn't — in the family group

The ATO's definition is strict. The specified individual's family includes their parents, grandparents, brothers and sisters, and those of their spouse; their children, nephews and nieces and their lineal descendants; and the spouses of all of those people. It does not include aunts, uncles or cousins. Other family trusts are in the group only if their FTE names the same specified individual; a sibling's trust that names the sibling is outside it, even though the sibling personally is inside.

'Distribution' is also wider than a trust resolution. The ATO lists dividends, capital distributions, payments, transfers of property and loans or debt forgiveness where the value exceeds what is given back. One of its examples is an interest-free, call-only loan from a family company to the specified individual's uncle — treated as a distribution, with FTDT applying.

The two most common mistakes

The first is treating the election as 'set and forget' — the ATO's own phrase for what not to do. The most common trigger in its examples is succession: children set up their own trusts naming themselves, and distributions from the parents' trust to those trusts fall outside the parents' family group. A bucket company owned by a trust naming a different family member can land in the same place.

The second is assuming a later election can fix it. It sometimes can't. An FTE can generally only be varied or revoked until the end of the fourth income year after the year it specifies, a variation can't be backdated, and the ATO says it has no power to extend those deadlines. The ATO's summary for several of its examples is the same line: the liability can't be reversed.

What the 31 December 2026 offer actually covers

The ATO cannot waive FTDT. What it can remit, case by case, is the GIC. Up to 31 December 2026, it says it may consider it fair and reasonable to remit GIC by 80% — leaving 20% payable — where the group proactively self-reviewed before any ATO review began, lodged the Family trust distribution tax payment advice (NAT 6175) and paid the FTDT. If the disclosure comes during the early stages of an ATO review but before audit, the remission is partial and lower.

It generally won't be available once a review has progressed to audit, once an FTDT notice has been issued, or where there is evidence of avoidance, fraud or evasion. A remission request with enough information still has to be made. And since 1 July 2025, GIC incurred on FTDT is not tax deductible, so whatever interest remains is paid from after-tax money. For the October to December 2026 quarter the ATO's GIC rate is 11.51% a year, compounding daily.

A practical order of work

Start with the paperwork: find the original FTE and any IEEs, and confirm which individual each one names — trustees are expected to keep these records. Registered tax agents can check what the ATO holds through the 'Family trust and interposed entity elections report' in Online services for agents, which since 18 April 2026 shows more detail, including the date each election was lodged. Then map the family group against every distribution, dividend and loan since the election took effect. If something falls outside, the ATO's instruction is to pay the FTDT as soon as possible with NAT 6175 so GIC stops growing, then request remission. Once FTDT is paid, the amount distributed may become non-assessable non-exempt income, and amendments can be requested to reflect that.

This is general information current as at September 2026, drawn from the ATO's family trusts guidance and its June 2026 tips for electing entities. It isn't advice about your group's structure and it doesn't predict any remission outcome — each request is decided on its facts. Whether a particular payment is a 'distribution', or whether an entity is inside a family group, often turns on details worth checking properly.

Our business accounting service covers trust and company groups, including election reviews. For related reading, see our pieces on the proposed 30% minimum tax for discretionary trusts from 1 July 2028 and on the ATO's GIC rate from 1 October 2026.