A second tax on income already taxed · no time limit · no discretion
The income tax was paid in full. Then a rule dating back to 1995, with no time limit and no discretion, taxes the same income again at the top rate and charges interest back to the day of an honest paperwork slip. Double tax, and in some cases triple. Parliament wrote it. Parliament can fix it.
The explainer · 3:31
$100,000 distributed in 1999 · income tax paid in full · what the Tax Office can claim today on the same money
$896,305
For one small mistake, 27 years ago, on income that was already taxed. Illustrative, to 16 September 2026.
The clause · in the Tax Office's own words
“We have no discretion to ignore the application of FTDT. We also cannot limit the period to which FTDT applies.”
Not for a typo.
Not for anyone.
Back to 1995.
No end date.
Australian Taxation Office, family trusts guidance, 2026 · C2
The problem · a 30-year-old trap
Since 1995, family trusts have been able to pass on franking credits and use losses, on one condition: keep distributions inside an elected family group. Step outside it, even by mistake, and the trust pays a penalty tax at the top marginal rate, 47% today, on income that has already been taxed in full. The same dollars, taxed twice, and where a company sits in the chain, three times. There is no time limit. C1 Most cases arise from benign circumstances, not avoidance. C8 Six of the most common:
01
A company or trust in the group never lodged its own interposed entity election.
02
A distribution to a cousin, an in-law or a family friend outside the test individual’s group.
03
Husband named on one election form, wife or a child on another. Every dollar stayed in the family, but on paper it went “outside the family group”, and the penalty applies.
04
A separation, death or remarriage quietly moves a beneficiary outside the group.
05
A clause nobody had read since the 1990s directs income to the wrong place.
06
No records to prove a distribution was made properly. Records only have to be kept for about five years, but the tax can reach back 30, so most families will no longer have them. C13
And two things most people don’t know
Families have had it confirmed in writing, twice, that all tax on a distribution was paid, and were still caught. The penalty is a separate tax. It applies even when the Tax Office has looked at the income tax and signed it off.
If you were a director of a trustee company, or of a company that made an interposed entity election, you are personally liable for the penalty, jointly and severally, even if you never took a dollar from the trust. C14
The debt clock
The same income · taxed twice
$896,305
In 1999 a family trust paid $100,000 to someone the rules say sat just outside its family group. Income tax was paid on it at normal rates: about $39,000, already in the Tax Office’s hands. Then the same $100,000 is taxed again. The penalty: the top tax rate, 48.5% or $48,500, then 27 years of interest compounding daily from day 81, with no assessment and no letter. The chart is the balance, year by year.
Day 81
Interest starts, unseen
Daily
Compounding, every day
Forever
No time limit
And that is one year
Most trusts distribute every year, so the same mistake is usually repeated every year, and each year is taxed again and runs up its own interest. Make the same slip each year from 1995 and $3.2 million of family income, on which $968,000 of income tax was paid, becomes a claim of $11.16 million.
Illustrative · distributions on 30 June · top marginal rate plus Medicare levy for each year · ATO quarterly interest rates, compounded daily, to 16 September 2026 · C5 · C6 · C7
Case studies · how honest families get caught
Nobody in these stories tried to avoid tax. The money stayed in the family and the income tax was paid. These are the situations tax lawyers are seeing right now.
Scenario 01 · Family business
The trust made an election in the 1990s. Years later a new accountant, with no ATO portal to check, made a second one naming another family member. Every distribution since stayed in the family, with all tax paid. The ATO now says the second election is invalid, and decades of distributions may face the penalty.
Scenario 02 · Small company
A buyer paid a fair price for a company at arm’s length. Nobody knew the company had once made an election tied to the old owner’s family trust. On the ATO’s published view, that election still applies, so dividends paid to the new owners can be caught and the profits are locked in the company.
Scenario 03 · Farming
As the farm grew, the family set up new entities and made the elections they were advised to. Under the technical definition, one fell outside the “family group” even though family members controlled it. The interest is now more than eight times the original penalty. They could lose the land and the house.
Scenario 04 · Farming
After 35 years on a wheat and sheep farm, the parents handed day-to-day running to their daughter and son-in-law, who set up their own trust. In a good season the parents’ trust sent money to help buy machinery. The daughter is family. Her trust, technically, is not. The penalty applies.
Scenario 05 · Trades
A suburban plumbing business. In the early 2000s their accountant made an election for a one-off tax benefit. Several accountants later, no copy survived. When the couple set up a second trust to buy their premises, its election named a different person. The ATO found the old one and is chasing distributions going back years.
Scenario 06 · Trades
Before advising a family-run mechanic, their accountant checked the ATO’s records. They showed no earlier election. Years later the ATO found one, naming someone else. Distributions made on the strength of the ATO’s own records are now said to attract the penalty.
Illustrative scenarios based on situations seen by tax lawyers. Not individual case files. Photographs are illustrative.
Who it hits
Almost half a million Australian businesses operate through a trust: the restaurant, the corner store, the factory, the builder, the farm. Around 819,000 discretionary trusts lodged returns in 2022-23. And it is not only the owners: directors of a trustee company, or of a company that made an election, are personally liable even if they never took a dollar from the trust.
C10 · C11 · C14
Photographs are illustrative, not case families.
Why it’s unfair
Ordinary income tax errors can generally only be reopened for a few years, unless there is fraud or evasion. Family Trust Distribution Tax has no time limit, and the Tax Office says it has no discretion, not even for a typo. C1 · C2
The “amnesty” that isn’t. The Tax Office will consider knocking up to 80% off the interest for trustees who self-review, lodge and pay before an audit starts, now until 30 June 2027. C12 It has never called this an amnesty, because it is not one. It does nothing to the penalty tax, which taxes income a second time and can on its own be enough to bankrupt a family before a cent of interest is counted. All it discounts is interest on a debt that nobody, including the Tax Office, knew existed. Getting in before the deadline does not make you safe.
| What the ATO offers | What the law needs | |
|---|---|---|
| The penalty tax (top tax rate, on income already taxed) | Unchanged | Waivable for genuine mistakes |
| The interest | Up to 80% off, case by case | Proportionate, from a final date |
| Already under audit | Excluded | Covered |
| After 30 June 2027 | Gone | Permanent, in the Act |
“We have no discretion to ignore the application of FTDT.”
Australian Taxation Office, family trusts guidance, 2026 · C2
“The current regime is unsustainable and poses an existential threat to some businesses and their advisers.”
CA ANZ, CPA Australia, IPA, NTAA and The Tax Institute, May 2026 · C9
What you can do
For individuals · trustees and family businesses
Six plain questions to check your trust, a calculator to quantify the mistake, and a two-minute email to your MP. Your answers stay in your browser.
Check my trust →For advisers · accountants, tax agents and lawyers
A client review checklist, a one-page technical briefing, a way to assess your own exposure to a negligence claim, and a letter to your MP.
Adviser tools →The solution · two changes, both essential
01
The same review period that applies to almost every other tax. Fraud and evasion stay open-ended, as they do now.
02
Let the Commissioner waive or reduce the tax for genuine mistakes where nobody gained a tax benefit.
Not one or the other. Both. A time limit on its own still crushes a recent honest mistake; a discretion on its own leaves thirty years of paperwork open forever. Also: let old elections be corrected without penalty, cover families already under audit, and fold the fix into the trust tax laws before they are finalised.
Tell your MP
Enter your postcode. We help you find your MP, you check the letter, it goes from your own inbox.
01
Your postcode opens the official electorate finder.
02
Add one sentence about you or your business.
03
It opens in your own email, ready to send. Two minutes.
