The ATO’s deadline for making ‘old’ family trust elections (FTEs) and interposed entity elections (IEEs) is fast approaching. These elections must be made by 31 May 2010 in order to be effective for utilising carried forward losses made before the 2005 income year. Over the next couple of days practitioners will need to take the following action:

Identify any clients with trusts that made losses in income years prior to 2005.
Confirm whether those trusts have already made FTEs that apply from the earliest loss year.
For trusts which have not made FTEs, consider whether they are likely to be able to satisfy the ‘normal’ trust loss rules in relation to the carried forward losses.
If there is any doubt as to whether the trust would be able to satisfy the normal trust loss rules, consider whether the trust should make a FTE before 31 May 2010 using the ATO’s administrative concession.

For many clients with trusts, making a FTE can greatly improve their ability to access franking credits and carried forward tax losses. The general rule is that the FTE needs to be in place from the start of the loss year in order to apply the concessional rules to those losses and from the start of the year in which the trust derives the dividends in order to access the franking credits.

Previously, FTEs had to be made in the tax return for the year of the loss. However, for income years starting on or after 1 July 2004 it is possible to make a retrospective FTE. This means that the trustee can backdate the election to an earlier year provided that the trust has always acted like a family trust. The earliest year that the election can be made under the legislation is for the 2005 year.

In PS LA 2004/1 (GA) the Commissioner announced a one-off opportunity to lodge a FTE or IEE for an income year before the 2004 income year. While the time period for making a retrospective election under the practice statement ended a number of years ago, the Commissioner has recently announced an extension for making these elections to 31 May 2010. This means that a trustee can make an election for 2004 or an earlier income year as long as the election is made by 31 May 2010.

In order to take advantage of this extension, the following conditions must be met:

The trust or interposed entity must pass the family control test from the beginning of the income year specified in the election; and
The trust or interposed entity must not have made any distributions of income or capital to persons outside the family group of the individual specified in the election. As above, this condition must be met from the beginning of the income year specified in the election.

Before the end of May 2010, practitioners need to consider whether any clients should have made FTEs or IEEs for an income year prior to the 2005 income year. If so, it will be necessary to follow the procedures set out on the ATO website and complete the forms.