Bucket company has franking credits but not enough retained profit

Not sure if my understanding is correct

I have a discretionary trust that's been distributing dollars and franking credits to a bucket company for the past few years. Bucket company has been raking in franking credits, but doesn't have much in the way of retained profits. Currently it's something like $10000 in franking credits and $10000 in retained profit.

I expect to have some low income years in the next few years. The plan was to have the bucket company declare a dividend to the trust but I'm now confused about how this situation would work - can the BC declare a $10000 dividend franked with $10000 of FCs to the trust, which would then on-distribute this to human beneficiaries? How can I enjoy the benefits of the FCs gathered over the years?

Lets assume the trust and bucket company has been set up correctly, I'm not worried about those types of issues, just want to know how franking and dividends work in this context.

 

What happened to the company's income?

A company can only pay a dividend to its shareholders. Is the trustee of the trust that it has received income from also the shareholder?

 

Yes trust owns the bucket company, and bucket company is also a beneficiary. I know it's not the ideal setup, I'm going to move it to a separate trust some time in future to get rid of the circularity of it, but for now it's what I've got.

 

45% tax rate on the trust income. s100A

 

why does the company have no retained profits ?

 

Did the trust make a family trust election back when ? It could mean franking isnt available !! Oh snap.

That a circular distribution and some reporting to the ATO is going to pose a problem...trustee beneficiary statement is required. s100A will impose tax on the trustee... and the company. No credit for franking perhaps. The net would be credited and paid to the beneficiary and when the trustee pays tax then that too is applied to the beneficiary. Double tax is going to likely apply here.

Looks like Part IVA based on the intentions too. Franking cancelled. Franking manipulation etc...I have seen deferral schemes like this. A investment company (Allco) years back used to do lots of these schemes and the ATO smashed them. Back then a ultimate beneficicary statement (UB) caught it but they simplified the rules in...2007 I think. They added a Limited Partnership (1%) to avoid the trustee beneficiary as such but ATO attacked that.

I still recall a well regarded porominent person on many boards and Govt adviser (education funding !!) who called me a c^%t when I set a deal with the ATO so my clienst didnt face penalties. And then his clients were hung.