Who gets franking credits in a DT

I am trying to find an answer to this question but can't find it here. May be this has been answered before but I could not find it in my search so posting it again.

If I buy LIC/ETF in a discretionary trust account and distribute income to family members who will get the franking credits as the shares are owned by trust?

 

The trust determines what its net trust income is for the year and distributes to beneficiaries based upon its decision and resolution may prior to the end of the year in most cases. Income is the gross value incl of tax credits etc. Each beneficiary receives a share of tax credits too.

If a company beneficiary receives income it will not get a refund of franking credits

 

can I distribute cash to a company beneficiary and credits to a person ?

 

no - well it depends what you mean. If you are asking can you distribute the dividends to person A and the franking credits to person B then no.

If you really do mean cash, as in corpus of the trust, then yes.

 

Provided the trust has the cash.

 

And if the franking credits are greater than 5k and the trust hasnt made a family trust election then noone will get them.

And if they have made an FTE and you distribute outside the group be prepared for Family Trust Distributions Tax

 

And the trust needs to have an income of at least $1 to pass on franking credits.

 

dividends not to person A, but company A. Franking credits go to person B.

yes, assuming LICs will give dividend of at least 4% the trust will have dividend income of greater than $1

 

Franking credits must follow the income they relate to.

No borrowings?

 

Not permitted. Company beneficiaries accumulate the franking credits in a franking account. The company would need to pay a franked div to shareholders at some time (assuming it able to...refer s254T of Corps Act) for credits to flow to a human. Of course their marginal rate will influence is additional tax is due, or a refund

 

and there may be a loss of some of the franking credits. if the trust distributed to a bucket company then the question needs to be asked is the bucket company a base rate entity.

could well be the bucket company receives dividends franked at 30% which hits the franking account at 30% but can only pay out a dividend from the bucket company at 27.5%. the additional franking credits are trapped.

 

Division 204 contains anti-streaming rules designed to prevent streaming of franked dividends/imputation credits to a shareholder who would benefit to a greater degree than another shareholder.

The Commissioner may apply sanctions under subdivision 204-D if a company streams a distribution in such a way that:

• an imputation benefit would be received by a shareholder (the favoured member) and the favoured member would derive a greater benefit from imputation credits than another shareholder (the disadvantaged member); and

• the disadvantaged member would receive lesser (or nil) imputation benefits, but might or might not receive other benefits (eg. bonus shares, return of capital, debt forgiveness or property).

Paragraph 3.38:

In general, therefore, the distribution of franked and unfranked distributions by a closely-held family company or trust among family members is unlikely to be streaming.

In addition, paragraph 3.42 states that "a difference in marginal tax rates of members … does not, by itself, indicate that some members derive a greater benefit from imputation credits."

The Explanatory Memorandum supports the conclusion that streaming does not generally occur when members simply do not receive a share in the company profits, particularly in the case of a closely-held company.

 

yes and some people have tried to attach the franking credits to trust income so they create at least $1 of income.

TR 2012/D1 means you are in danger if you do that. The ATO basically say they will exclude notional amounts from the calculation of income of the trust estate. Think Paul raised this a little while ago does income of the trust estate include franking credits. ATO says no.

 

no ... why?

 

Yes you can give all your dividends to DT

 

If there was then there may have been interest payable.

 

I think the “D” is important with this ruling.

It was introduced as draft 6 years ago. And it deserves to stay there.

 

Yes ross but is the view of the ATO regarding notional amounts. If you include franking credits which are notional amounts as income of the trust estate the ATO will argue its not correct.

The NTAA raised that very issue in the recent Trust Basics 2018 seminars they just conducted and confirmed if one does so they do so contrary to the opinion of the ATO and arent covered by any safe harbour provisions.

Credit to the NTAA for their comments

"
It is possible the High Court appeal from Thomas & Anor v Commissioner of Taxation [2017]
FCAFC 57 may shed some light on this matter (this case concerned a taxpayer who sought
to stream franking credit tax offsets separately to the underlying franked dividend – refer
below under hearing 3.2.2), however, at the time of writing, this appeal was yet to be heard
and handed down.

As uncertainty in this area remains, it is recommended that any trustee who intends
adopting a position that does not accord with TR 2012/D1 be informed of the potential risk
associated with that position in the event of an ATO audit or review."

Are accountants who are including notional amounts in income of the trust estate informing their clients of that risk ?

The ability of a trustee to stream a franked dividend can be compromised where trust income is
defined to include a franking credit. It is generally recommended that trust income be configured
to exclude franking credits where possible. Not sure why accountants arent taking the more conservative approach of defining trust income to exclude franking credits and ensure it also complies with the ATO's view. This is provided the trust deed allows the trustee to determine how to define trust income.