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  • Avoiding double taxation – Division 6E

    Trust capital gains and franked distributions are assessed under Subdivision 115-C and Subdivision 207-B of the ITAA 1997 respectively. Division 6E ensures that they are not assessed again under the core trust rules in Division 6.

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    When Division 6E applies

    Division 6E applies if:

    • the net income of the trust is greater than zero
    • in working out the net income, the trustee took into account any of the following:    
      • the amount of a capital gain that remained after applying capital losses or any CGT concessions
      • the amount of a franked distribution that remained after reducing it by directly relevant deductions
      • a franking credit.
       

    How Division 6E applies

    Division 6E adjusts the amounts otherwise assessed to a beneficiary (or the trustee) under Division 6.

    Broadly, Division 6 assesses:

    • a beneficiary who is presently entitled to a share of trust income on that same percentage share of the trust's net income
    • the trustee on any net income not assessed to a beneficiary.

    Essentially, Division 6E requires the trustee and beneficiaries to apply Division 6 on the assumption that the trust had no capital gains or franked distributions.

    Assumptions

    To work out the amount assessed to a beneficiary or a trustee under Division 6, assume that the:

    • trust's income equals the Division 6E income of the trust
    • net income of the trust equals the Division 6E net income of the trust
    • amount of a beneficiary's present entitlement to trust income equals the amount of the beneficiary's Division 6E present entitlement to trust income.

    Division 6E definitions are found under section 102UY of the ITAA 1936.

    Division 6E income

    The Division 6E income of the trust is the trust's income worked out on the assumption that it doesn't include any amounts attributable to:

    • the amount of any capital gains that remained after applying capital losses and any CGT concessions
    • the amount of any franked distributions that remained after reducing them by deductions directly relevant to them
    • any franking credits.

    The Division 6E income amount can't be less than nil – even if the amounts attributable to capital gains, franked distributions and franking credits exceed trust income.

    Division 6E net income

    Division 6E net income of the trust is the net income of the trust worked out on the assumption that it does not include:

    • the amount of any capital gains that remained after applying capital losses and any CGT concessions
    • the amount of any franked distributions that remained after reducing them by deductions directly relevant to them
    • any franking credits.

    Again, the amount cannot be less than nil.

    Division 6E present entitlement to income

    A beneficiary's Division 6E present entitlement to trust income is effectively the beneficiary's present entitlement excluding amounts relating to the beneficiary's share of capital gains and franked distributions.

    Example: adjustment of Division 6 amounts

    Tudor Trust has income of $470,000, consisting of $100,000 rental income, a $70,000 franked distribution and a $300,000 capital gain (for trust purposes). The trust also has $30,000 of franking credits and a $100,000 prior year capital loss and is entitled to the 50% CGT discount on the capital gain.

    The trust's net income is $300,000. This is calculated as $100,000 rental income, $70,000 franked distribution, $30,000 franking credits and a net capital gain of $100,000 ($300,000 capital gain – $100,000 capital loss x 50% CGT discount).

    The trustee resolves to distribute the trust income to three beneficiaries as follows:

    • Henry – all of the rental income ($100,000)
    • Anne – all of the franked distribution ($70,000)
    • Jane – all of the capital gain ($300,000).

    The Division 6E income is $100,000. This is calculated as $470,000 less $70,000 (the franked distribution) and less $300,000 (the trust capital gain).

    The Division 6E net income is $100,000. This is calculated as $300,000 less $100,000 (the sum of the franked distribution and attached franking credits) and $100,000 (the capital gain remaining after losses and discounts are applied).

    Henry's Division 6E present entitlement to the Division 6E income of the trust is $100,000 (no part of which is attributable to capital gains or franked distributions). He is assessed on $100,000 under Division 6 (as he has a 100% share of the Division 6E income and is therefore assessed on 100% of the Division 6E net income).

    Anne's Division 6E present entitlement to the Division 6E income of the trust is nil (because the franked distribution is disregarded). She is not assessed on any amount under Division 6 (however, she is assessed on the franked distribution and attached franking credits under Subdivision 207-B of the ITAA 1997).

    Jane also has a Division 6E present entitlement of nil (because the capital gain is disregarded). She is not assessed on any amount under Division 6 (however, she is taken to have made a capital gain under Subdivision 115-C of the ITAA 1997).

    End of example
      Last modified: 22 Apr 2016QC 24534