Franking credits within a trust

Hi All,

We have a discretionary trust that holds both property and managed funds. If the income from the managed funds includes franking credits how are those credits distributed to the beneficiaries? That is, can the trustee distribute the franking credits separately from the income?

I'm really lost when it comes to these sort of things, so I don't even know if my question makes sense.

Thanks.

John.

 

is the property currently negatively geared?? is the actual trust making an accounting and trust profit for the year??

FC can be distributed sepertly only when there is an accounting and trust profit...

 

The property is pretty close to neutral and the managed funds provide a profit, so overall I think the trust has a net profit.

If the trust was making a loss what happens to the FCs. Are they carried over till they can be distributed?

John.

 

How ever much of the profit is, is how many FC you can distribute, if you get 7k of shares with 3k franking credits, and the property is 1k negative geared, you can only distribute 6k of shares (and there attached FC worth $2700). If the property is in a profit by 1k, you have 8k of profit to distribute and 3k of credits, you are able to stream the distribution of 1k (property) profit to someone and 7k (shares) profit + FC to someone else. However if this is a Family Trust, i think a family election needs to be applied...


I am not sure how it works if you have neg property, shares with FC and un franked FC (or bank interest etc), im not sure which gets charged to the loss first though

However if the trust has a accounting (tax) net profit but a trust net loss, you are unable to distribute any money but still have to be taxed on the accounting profit, in this case the trustee is the one who has to pay the tax (at there marginal tax rate) and is able to be reimbursed from the trust for the tax payable...

Nope, FC are lost if they are not claimed in the year. I think this is why people say its worth while spilting property and shares into 2 different trusts....

i think ive got it all right, however dont be 100% relied upon it, happy to be corrected if someone sees a mistake...

 

Thanks for your thoughts Dave. Apparently it's a bit more involved than I was hoping it would be. Looks like I'd better have a few discussions with my accountant before getting too seious about this stuff.

John.

 

Franking credits can't be streamed separately to the income they relate to. If the trust has a loss, the franking credits cannot distributed at all, they are lost.

Dave - there is no need to pro-rate franking credits if the amount of net income in the trust is less than the dividends. Provided there is a positive taxable income, all the credits are distributable. For example if a trust received $7k dividends + $3k credits, and had $9k interest, than all $3k credits are usable. If the trust had interest of $11k, they are all lost.

As the franking credits are distributed with the dividend, you should check the trust deed and distribution minute to check who can/has receive(d) the dividends and therefore the credits.

 

If you have a trust holding shares and you distribute the dividends plus the attached franking credits to a second trust holding property to help with the cashflow, are the franking credits lost if the second trust still doesn't make a profit?

If on receipt of the dividends, the second trust does make a profit by turning a negatively geared IP into positive cashflow can all of the franking credits then be distributed to yourself, as a beneificiary of the second trust?

I get a bit confused with this topic so hope my questions make sense!

 

I need to clarify DaveA above statement. In the above example, you can still distribute all the franking credits. As long as you have $1 of taxable income you can still distribute all the imputation credits that are in the trust.

 

To work our how you can distribute the income you need to refer to your trust deed on how to distribute the income. In most cases, I find it easier to adopt a proportionate method of distributing accounting and tax income, including all the credits attached to the distribution.

Any good accountant should be able to work out the best way to distribute your income, taking into account things like repayment of HECS, Medicare Surcharge, FTB etc.

 

thanks for correcting me.... i do know that however i wrote it incorrectly, sorry for the mistatement...

 

Provided the original trust has made an ultimate beneficiary declaration then there is no problem flowing down to a trust beneficiary.

Of course the beneficiary Trust must make a distribution statement within 2 months of the end of year, as well as having at least $1 of taxable income to distribute.

And the beneficiary (you) of the sub-trust are a 'qualified person' for the Franking Credit.

Cheers,

Rob

 

Hi Rob, thanks for answering my question. I'll go read up on ultimate beneficiary declarations and qualified persons to get a full understanding.

On franking credits, if I have two other trusts both with negative geared IP's and I distribute 60% of the dividend income to one and 40% to the other do I have to split the imputation credits in the same percentage or can one trust receive more of the credits than the other?

 

For each discretionary trust or closely held trust that makes a distribution to another trust, just lodge an ultimate beneficiary statement.

Franking credits are allocated in the same proportion as the underlying dividends, see TR 92/13.

For a discretionary trust that has not made a Family Trust Election, a beneficiary can only qualify provided their TOTAL franking credits from all sources is less than $5000.

Don't forget, the imputation credit is grossed up into your net income.

e.g. Trust:

Net Rental income -$99 (negatively geared)
Fully franked dividend $70
Imputation credit $30
Equals net income $1

So ... distribute $1 to a (qualified) beneficiary, along with the $30 franking credit.

Whether you can stream different types of income to different beneficiaries in a more tax-effective manner depends on the trust deed and the detail with which you have kept your accounts.

There is a whole minefield in this mess of mixing Trust Law and Tax Law, which is why it is always recommended that you get personal advice !!

Cheers,

Rob

 

Hi Rob,

Nice example, it makes sense.

According to the 2007 version of the Partnership and Trust Tax Returns Instructions you might not have to:

http://www.ato.gov.au/content/downloads/NAT2297_6_2007_bw.pdf



Is a beneficiary named at item 59 a trustee beneficiary?
If you are a trustee of a closely held trust with trustee beneficiaries – that is, if you distribute net income to other trusts, presently entitled to a share of net income or tax preferred amounts – print Y for yes at W. If you do print Y here, you only need to complete and lodge an Ultimate beneficiary schedule if:

- you have an ultimate beneficiary non-disclosure tax liability for the year under consideration, or

- the commissioner requests an ultimate beneficiary statement.



This may be wrong because Appendix 12 of the same document says:



Trustees of closely held trusts with trustee beneficiaries presently entitled to net income or tax preferred amounts – non-assessable income and capital – must disclose to the commissioner the identity of ultimate beneficiaries presently entitled to netincome and tax-preferred amounts.

What the

 

Hi OLI,

The instructions refer to PS LA 2001/12, paragraph 9.

Basically, where your closely held trust distributes to another trustee but you can identify the beneficiaries (the usual situation) then you tick the box because you "notionally have a reporting obligation", but you would not have a UBNDT liability as you can identify them so you don't normally need to lodge the statement.

Cheers,

Rob

 

Franking credits

Is it correct to assume that a franking credit cannot be split 50-50 if a discretionary trust distributes income to two beneficiaries ? Dallee

 

If in doubt read the tax ruling! It answers this question

"A resident beneficiary ... is entitled to a rebate of tax equal to the part of the imputation credit that bears the same proportion as the beneficiary's share of the franked dividend income bears to the total franked dividend included in net trust income."

Dallee

 

Hi Rob,

thanks for all the info. I have one more question for you if you have the time.

Does that $5000 limit apply to the entire discretionary trust or to each individual beneficiary?

Is there any chance you could provide a source as well e.g. the particular section of the relevant act?

Thanks in advance

Henry09

 

The $5000 exemption counts ALL sources for the beneficiary.

Franking credits treatment in Subdiv 207-B ITAA97.

Commissioners interpretation on streasming TR 92/13.

Cheers,

Rob