Issue
Can the trustee of a family trust make an interposed entity election (IEE) pursuant to section 272-85 of Schedule 2F to the Income Tax Assessment Act 1936 (ITAA 1936) to be included in the family group of another family trust where the primary individuals are not the same (in this case the respective primary individuals are brothers)?
Decision
Yes. The trustee of a family trust can make an IEE to be included in the family group of another family trust where the primary individuals are not the same as long as the respective family control test is passed.
Facts
X is the primary individual specified in the family trust election (FTE) of the X family trust. The FTE is in force.
Y is the primary individual specified in the FTE of the Y family trust. The FTE is in force.
X and Y are brothers.
The trustee of the X family trust intends to make an IEE pursuant to section 272-85 of Schedule 2F to the ITAA 1936 to be included in the family group of Y.
The X family trust passes the family control test pursuant to subparagraph 272-87(1)(a)(ii) of Schedule 2F to the ITAA 1936 in relation to primary individual Y as X is able to control the trust in accordance with paragraphs 272-87(2)(a) to 272-87(2)(e) of Schedule 2F to the ITAA 1936.
Reasons for Decision
An entity may make an IEE to be included in the family group of an individual specified in a family trust election pursuant to section 272-85 of Schedule 2F to the ITAA 1936. Subsection 272-85(4) of Schedule 2F to the ITAA 1936 requires the entity to pass the family control test at the end of the income year.
Broadly, an entity passes the family control test pursuant to section 272-87 of Schedule 2F to the ITAA 1936 if the entity is controlled by either the primary individual, or by members of the primary individual's family or a combination of both.
As the primary individuals of the X and Y family trusts are brothers, the X family trust can pass the family control test pursuant to section 272-87 of Schedule 2F to the ITAA 1936 in relation to the Y family trust. This is because pursuant to subparagraph 272-87(1)(a)(ii) of Schedule 2F to the ITAA 1936 one or more members of the primary individual's family to which the IEE will relate, controls the family trust it is being interposed into.
Therefore, subject to the other conditions in section 272-85 of Schedule 2F to the ITAA 1936 being satisfied, the trustee of the X family trust can make a valid IEE to be included in the family group of Y.
Subsection 272-85(7) of Schedule 2F to the ITAA 1936 restricts an entity making multiple IEEs to situations where the primary individual is the same person in respect of all the family trusts being interposed into. In this case, any further IEEs being made by the trustee of the X family trust can only be in relation to family trusts where Y is the primary individual. Note: If the X family trust makes distributions to persons who are not members of the family group of X, as defined by section 272-90 of Schedule 2F to the ITAA 1936, a liability for family trust distribution tax (FTDT) under subsection 271-15 of Schedule 2F to the ITAA 1936 will be imposed. However, because the trustee of X family trust has also made an IEE in relation to the Y family trust, subsection 271-20 of Schedule 2F to the ITAA 1936 will apply to impose FTDT upon any distributions which are made to persons who are not members of Y's family group. This effectively narrows the list of potential persons who can benefit from distributions of the X family trust, without attracting FTDT liability, to those persons who are common 'family members' of both the X and Y family trusts.