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  • Imputation tax offset and franking credit refunds – trustees

    A trustee is liable to be assessed on a share of the trust's net income where there is either:

    • no beneficiary presently entitled (section 99 or 99A of the Income Tax Assessment Act 1936 (ITAA 1936))
    • a beneficiary is under legal disability (section 98 of the ITAA 1936).

    A trustee is entitled to a tax offset for any franking credit included in their share of net income on which they are assessed. This is from all forms of income, not just dividend income. Their tax offset will reduce their tax liability for the income year.

    However, they are not entitled to a refund for any excess franking credits except in limited circumstances. This is only when the trustee is assessed under section 99 of the ITAA 1936.

    Eligibility for the tax offset and thus the refund is subject to imputation integrity rules In Division 207 of the ITAA 1997, in particular the franking credit trading rules. The trustee must be a qualified person and be considered the true economic owner of the shares. They can meet this test by satisfying the holding period rule or the related payments rule.

    If the trust has no net income (as determined under section 95 of the ITAA 1936) or has made a loss for tax purposes, there is no trust amount assessed to the trustee. The benefit of the imputation credits attached to the franked dividends is lost.

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    Trustees assessed under section 98 or section 99A

    Trustees liable to be assessed under section 98 or section 99A of the ITAA 1936 can claim imputation credits as a tax offset, subject to the integrity rules. They are not eligible for a refund of excess imputation credits.

    Section 98

    A trustee is assessed under section 98 of the ITAA 1936 when a beneficiary is presently entitled to a share of the net income of the trust but is under a legal disability (for example, the beneficiary is under 18 years old). The trustee is assessed on the beneficiary's share of the net income as if it were the income of an individual taxpayer.

    If the beneficiary is also assessed on the trust income, they are entitled to a credit for the tax paid or payable by the trustee. Where the trust income to which eligible resident beneficiaries are presently entitled includes franked dividends, the eligible beneficiary can claim the imputation credits as a tax offset and, if there are excess imputation credits, the excess would be available to the individual beneficiary as a refund.

    Section 99A

    A trustee is assessed under section 99A of the ITAA 1936 when there is net income of a trust to which no beneficiary is presently entitled, and where section 99 of the ITAA 1936 does not apply. The trustee is taxed on this net income at the highest marginal rate of tax (49% in the 2016–17 income year).

    Trustees assessed under section 99

    Trustees assessed under section 99 of the ITAA 1936 can claim imputation credits as a tax offset, subject to the integrity rules. They are also eligible for a refund of excess imputation credits.

    A trustee is liable to be assessed under section 99 of the ITAA 1936 where:

    • there is an amount of net income of the trust (as determined under section 95 of the ITAA 1936) to which no beneficiary is presently entitled
    • we think it unreasonable for the trustee to be assessed under section 99A of the ITAA 1936
    • the trust estate either:
      • is a deceased estate
      • is a bankrupt estate administered by the official receiver or a registered trustee
      • consists of property that was transferred to the trustee for the benefit of the beneficiary by way of damages. This may be for:
        • loss of parental support
        • mental or physical injury
        • workers' or criminal injury compensation
        • death benefits under life insurance policies or similar
        • property received from a public fund for the relief of persons in necessitous circumstances
        • property received in certain family breakdown situations.
         
       

    Trustees of resident trust estates who are liable to be assessed under section 99 of the ITAA 1936 are taxed on the net income of the trust to which no beneficiary is presently entitled. They are taxed at resident individual rates without the tax-free threshold.

    The tax-free threshold applies for deceased estates less than three years old. This is before the end of the income year the trustee is liable to be assessed in.

    Franking credit refunds

    The trustee may receive a refund where:

    • the resident trust estate is liable to be assessed under section 99 of the ITAA 1936 on undistributed trust income
    • the undistributed trust income includes franked dividends
    • the basic tax liability for the income year is less than their total imputation credits attached to the dividends – this is after taking into account any other tax offsets they are entitled to.

    A trust is a 'resident trust estate' if at any time during the year of income, either:

    • a trustee was a resident of Australia
    • the central management and control of the trust estate was in Australia.

    The amount the trustee is refunded reflects the excess of any imputation credits, after applying the imputation credits and any other tax offsets. It reduces the basic income tax liability of the trustee down to nil.

    How to apply for the refund

    Trustees who are eligible for a refund of excess imputation credits can claim the refund in their trust tax return.

    They must retain the dividend statements from the company that paid the franked dividends or the trust that made the franked distributions in their records. These statements should show the amount of the dividend and the imputation credit, together with the date of payment.

      Last modified: 01 Dec 2016QC 50659