Calculating shares of the franked distribution and attached franking credit

Example: tax treatment of trust franked distributions

In 2019–20, Lang Trust received $100,000 of rental income and a $70,000 fully franked distribution (with $30,000 of franking credits attached). The trust incurred $20,000 of expenses that related to the rental income.

Therefore, the trust's income is $150,000 ($100,000 minus $20,000 plus $70,000) and its net income is $180,000 ($150,000 income plus $30,000 franking credits).

The trust has two resident beneficiaries, Lucy and Hannah. Lucy is presently entitled to 50% of trust income (that is, $75,000). In accordance with a power under the deed, the trustee makes Hannah presently entitled to $50,000, which is recorded in the accounts as being referable to the franked distribution. The amount that Hannah is specifically entitled to is also $50,000, calculated as follows:

Franked distribution x (Share of net financial benefit / Net financial benefit)

$70,000 x ($50,000 / $70,000) = $50,000

The remaining $20,000 of the franked distribution is an amount to which no beneficiary is specifically entitled.

In addition, the trustee resolves to make Hannah entitled to so much of the remainder of the trust's income as to make her total present entitlement equal to 50% of trust income. This has the effect of making Hannah entitled to an additional $25,000.

Neither Hannah nor Lucy is under a legal disability.

Working out Hannah and Lucy's taxable portions

Step 1: determine the share

Each beneficiary's share of that franked distribution is made up of both:

• any amount they are specifically entitled to
• their adjusted Division 6 percentage share of the part of the franked distribution to which no beneficiary is specifically entitled (that is, $70,000 less Hannah's specific entitlement to $50,000 = $20,000).

To work out each beneficiary's share of this remaining $20,000 of the franked distribution, they first need to work out their adjusted Division 6 percentage of trust income. This is done by:

• working out their present entitlement to trust income excluding any capital gains and franked distributions they are specifically entitled to
• expressing the result as a percentage of the amount of trust income excluding any franked distributions and capital gains any entity is specifically entitled to.

The trust's income excluding the amount of franked distributions and capital gains to which any entity is specifically entitled is $100,000 ($150,000 income less $50,000 of specific entitlements to the franked distribution).

Hannah's adjusted Division 6 percentage is calculated as follows:

• Hannah's present entitlement to trust income ($75,000), less Hannah's specific entitlement to the franked distribution ($50,000) = $25,000
• divided by $100,000, being the trust income excluding amounts of capital gains and franked distributions any entity is specifically entitled to
• = 25%.

Lucy's adjusted Division 6 percentage is calculated as follows:

• Lucy's present entitlement to trust income ($75,000)
• divided by $100,000, being trust income excluding amounts of capital gains and franked distributions any entity is specifically entitled to
• = 75%.

Each beneficiary's share of the franked distribution is made up of both:

• any amount they are specifically entitled to, and
• their adjusted Division 6 percentage share of the $20,000 franked distribution that no beneficiary is presently entitled to.

Therefore, the beneficiary's shares of the franked distribution are:

• Hannah: $50,000 + (25% x $20,000) = $55,000
• Lucy: $0 + (75% x $20,000) = $15,000.

Step 2: the share as a percentage of the distribution

Divide the amount worked out at step 1 by the gross amount of the distribution and multiply by 100.

• Hannah: ($55,000 / $70,000) x 100% = 78.57%
• Lucy: ($15,000 / $70,000) x 100% = 21.43%

Step 3: determine the attributable franked distribution and share of franking credit

The attributable distribution

Separately for Hannah and Lucy, multiply the amount of the trust's franked distribution net of directly relevant expenses by the percentage worked out at step 2. Given that there are no expenses directly related to the franked distribution, the net franked distribution amount is the same as the gross franked distribution amount. Therefore, the attributable franked distribution amount will be the same as each beneficiary's share of the franked distribution (calculated at step 2):

• Hannah's share: $70,000 x 78.57% = $55,000
• Lucy's share: $70,000 x 21.43% = $15,000.

The share of franking credits

Separately for Hannah and Lucy, multiply the amount of the franking credit attached to the distribution ($30,000) by the percentage worked out at step 2:

• For Hannah: $30,000 x 78.57% = $23,571
• For Lucy: $30,000 x 21.43% = $6,429.

Hannah and Lucy's assessable income under Subdivision 207-B

Under the rules in Subdivision 207-B of the ITAA 1997, Hannah and Lucy's assessable income from the trust's franked distribution is:

• Hannah: $55,000 attributable franked distribution plus $23,571 share of franking credit = $78,571
• Lucy: $15,000 attributable franked distribution plus $6,429 share of franking credit = $21,429.

Assuming they meet the relevant integrity rules, Hannah and Lucy are both entitled to a tax offset equal to their share of the franking credit.

End of example