A discretionary trust may make a family trust election, this is an optional declaration made to the Tax Office, notifying the Tax Office of the desire to be treated as a 'family trust' for taxation purposes. The family trust status with the ATO provides simplification of the tax rules which apply to the trust.
As part of the election the trustee chooses a particular (test) individual around whom a family group is formed. This family group sets the boundaries around who the trustee can distribute to without adverse tax outcomes. As a result the trust may become less flexible and if distributions are made to someone outside the test individuals family group they can be subject to Family Trust Distribution Tax. This is basically the maximum individual tax rate plus the medicare levy, currently 49%.
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