• Receiving a distribution through a partnership or trust

    Franked distributions to partnerships and trusts are generally treated as flowing indirectly to the partners and beneficiaries respectively.

    The taxable amount is the distribution grossed up by the amount of the franking credit. Only the ultimate recipients of the distribution, who are assessed on the share of the net income that flows indirectly to them, are entitled to the tax offset.

    The recipients include in their assessable income their share of the franking credit attached to the distribution. They are then entitled to a tax offset equal to that share of the franking credit. This is provided they are not themselves a partnership or trust through which the distribution flows indirectly.

    Where the trustee, rather than a beneficiary, is taxed on a distribution or share of a distribution, the trustee is entitled to the tax offset.

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    Partnerships

    When calculating its net income or loss for tax purposes, a partnership that receives a franked distribution includes both the amount of the dividend and the franking credit in its assessable income.

    This is subject to the partnership satisfying certain integrity rules (such as the qualified person test and other relevant rules).

    Individual partners then include in their individual returns:

    • their portion of the partnership income or loss
    • their portion of the franking credit.

    They are entitled to a tax offset equal to their portion of the franking credit if all other eligibility tests are met.

    Example: Partnership receiving a dividend

    Fleyes, Hye and Winns is a small partnership operating a contract cleaning service. The three partners receive equal shares of any distributions.

    During 2014–15 the partnership receives $900 in dividends with a $300 franking credit attached.

    The partnership meets all the conditions to claim the franking credit.

    As a result of the dividend, Fleyes, Hye and Winns include $1,200 in the net partnership income shared by the partners.

    Each partner is assessed on their $400 share of the partnership income, and is entitled to a tax offset of $100 representing their share of the franking credit.

    End of example

    Partnership loss

    If the partnership has a loss, and the grossed-up dividend is included in the loss calculation, a partner is still entitled to a tax offset representing their share of the franking credit.

    Example: Partnership with a net loss

    Assume that the partnership of Fleyes, Hye and Winns (see previous example) makes a loss for the year of $1,800 before including the $1,200 grossed-up dividend income ($900 dividend with $300 franking credit).

    The net loss for the partnership after including the grossed-up dividend income is $600.

    Each partner can claim a deduction in their individual tax returns of $200 as their share of the partnership loss.

    They remain entitled to a tax offset of $100 each representing their share of the franking credit.

    End of example

    Trusts

    A trustee receiving a franked dividend includes both the amount of the dividend and the franking credit in the trust's assessable income when calculating the trust's taxable income or loss. This is subject to the trust satisfying the integrity rules. In particular the franking credit trading rules about the qualified persons test (holding period rule and related payments rule) and other relevant rules).

    The beneficiaries who are presently entitled include in their tax returns:

    • their portion of the trust income (as determined under section 95 of the Income Tax Assessment Act 1936)
    • their portion of the franking credit.

    They are entitled to a tax offset equal to their portion of the franking credit if all other eligibility tests are met. Special rules are also available that allow trustees to create specific entitlements to franked distributions.

    Note: If a trust has no net income or makes a loss, the benefit of the franking credit is lost. That is, there is no tax offset.

    Example: Trust income fully distributed

    The trustee of the Cowslip Family Trust only receives income from share market investments. In 2014–15, the trustee receives $8,000 in dividends, with $2,000 in franking credits attached.

    The trustee has no other income or expenses.

    The net income of the trustee is $10,000 (that is, the dividend income of $8,000, grossed up by the $2,000 franking credit).

    Michael, Meredith and Norton are Australian resident beneficiaries of the Cowslip Family Trust who are presently entitled to all of the trust income as follows:

    • Michael is entitled to 40%
    • Meredith is entitled to 50%
    • Norton is entitled to the remaining 10%.

    Each beneficiary includes their share of the grossed-up net income in their assessable income, and is entitled to the same share of the franking credits.

    Michael includes $4,000 in his assessable income and is entitled to a tax offset of $800.

    Meredith includes $5,000 and is entitled to a tax offset of $1,000.

    Norton includes $1,000 and is entitled to a tax offset of $200.

    End of example

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    Where there is no present entitlement or other trustee liability

    A trustee is liable to be assessed on a share of the trust's net income in certain circumstances. For example, where there is no beneficiary presently entitled (section 99 or 99A of the ITAA 1936) or a beneficiary is under a legal disability (section 98 of the ITAA 1936).

    The trustee is entitled to a tax offset for any franking credit included in the share of net income on which they are assessed. However, they are not entitled to a refund for any excess franking credits except in limited circumstances when the income is assessed under section 99 of the Income Tax Assessment Act 1936.

    Example: Trust income with no present entitlement

    Assume in the previous example that Michael and Meredith are presently entitled to 90% of the net income of the trust, but that no-one is presently entitled to the remaining 10%.

    The trustee is assessed on $1,000 of income, and is entitled to a $200 tax offset representing the 10% share of the franking credit included in the net income of the trust.

    End of example

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    Last modified: 01 Dec 2016QC 47312