Interposed entity election - entity owned by trustee of family trust

The Note to this ATO ID previously said "each family trust must make an interposed entity election to become a member of the same family group. Refer to ATO ID 2004/697."

The Note was removed because ATO ID 2004/697 was withdrawn after amendments to section 272-90 of Schedule 2F to the Income Tax Assessment Act 1936 (ITAA 1936) that take effect from 1 July 2007. Despite its removal, the Note to this ATO ID remains valid up until 30 June 2007.

Is a company, where all the shares are owned by the trustee of a family trust, required to make an interposed entity election pursuant to section 272-85 of Schedule 2F to the ITAA 1936 to be a member of the family group in relation to another family trust, where both trusts have specified the same individual in their family trust elections?

No. Pursuant to paragraph 272-90(5)(c) of Schedule 2F to the ITAA 1936 where all the fixed entitlements to all the income and capital of a company are held by the trustee of a family trust, that company is a member of the primary individual's family group.

The trustee of Trust A has made a family trust election which is in force. The trustee of Trust A owns all the shares in Company C. These shares provide fixed entitlements to all the income and capital of the company pursuant to section 272-10 of Schedule 2F to the ITAA 1936.

The trustee of Trust B has also made a family trust election which is in force. Trust B has made a distribution of income to Company C.

Both trusts have specified the same test individual in their respective family trust elections.

Company C has not made an interposed entity election in relation to either of the family trusts.

A company must be a member of the family group of the primary individual specified in the family trust election if a distribution is to be made, by the family trust to the company, without incurring a Family Trust Distribution Tax (FTDT) liability.

Section 272-90 of Schedule 2F of the ITAA 1936 specifies the family group of an individual specified in a family trust election in relation to a conferral of present entitlement or distribution of income or capital upon or to that person.

Subsection 272-90(5) of Schedule 2F to the ITAA 1936 provides that companies, partnerships or trusts will be members of the primary individual's family group in relation to the conferral or distribution if, when the conferral takes place or the distribution is made: • the primary individual; or • one or more members of the primary individual's family; or • the trustees of one or more family trusts, provided the primary individual is specified in the family trust election of each of those family trusts; • or any combination of the above, have fixed entitlements directly or indirectly, and for their own benefit, to all of the income and capital of the company, partnership or trust.

Pursuant to paragraph 272-90(5)(c) of Schedule 2F to the ITAA 1936, the trustee of Trust A has fixed entitlements directly or indirectly, and for its own benefit, to all of the income and capital of the company, therefore Company C is a member of the family group of the primary individual specified in the family trust election of Trust A.

Both family trusts have specified the same primary individual in their family trust elections, consequently an interposed entity election will not be required to ensure there is no liability for FTDT in relation to the distribution from Trust B.