Non-widely held trusts and the franking tax offset

Qualified person and the franking tax offset

Special rules apply to shares acquired on or after 31 December 1997 that are held by a non-widely held trust. Both the trustee and beneficiaries need to be qualified persons in relation to the shares for the beneficiaries to be entitled to a franking tax offset. Generally, this requires that both the trustee and the beneficiaries satisfy the holding period rule and, if applicable, the related payments rule.

A beneficiary of a non-widely held trust can also be a qualified person if:

• the trustee satisfies the holding period rule and, if applicable, the related payments rule, and
• the beneficiary is eligible for the individual small shareholder exemption.

Holding period rule for non-widely held trusts

The holding period rule requires that both the trustee and beneficiaries of a non-widely held trust hold the shares, or an interest in shares, 'at risk' for 45 days (90 days for preference shares) during the qualification period. At the completion of this period, the trustee and beneficiaries become qualified persons in relation to those specific share holdings.

The holding period rule only has to be satisfied once for each purchase of shares by both the trustee and beneficiaries.

Trustees of non-widely held trusts

For a trustee of a non-widely held trust to be a qualified person in relation to shares or an interest in shares, the holding period rule applies. This rule requires that shares or an interest in shares are held 'at risk' by the trustee for a continuous period of at least 45 days (90 days for preference shares) during the qualification period.

If the trustee of a non-widely held trust is not a qualified person in relation to one or more shares or interests in shares forming part of the trust estate, then the beneficiaries can't be qualified persons in relation to those shares or interests.

Trustee holds shares or interest in shares at risk

A trustee holds shares or an interest in shares as part of the trust estate of a non-widely held trust 'at risk' when the trustee does not have materially diminished risks of loss or opportunities for gain in respect of the shares or interest. A trustee has materially diminished risks of loss or opportunities for gain if the trustee's net position in relation to the shares or interest in shares has less than 30% of those risks and opportunities.

Arrangements such as hedges, options and futures may reduce the financial risks of holding shares or an interest in shares.

Trustee qualification period

The qualification period for trustees is generally the period beginning on the day after the trustee acquired the shares, or the interest in the shares, and ending on the 45th day (or 90th day for preference shares) after the day on which the interest became 'ex dividend'. The shares become 'ex-dividend on the day after the last day on which the acquisition of a share will entitle the person to receive a dividend.

The 45-day and 90-day periods don't include the day of acquisition or, if the shares or interest have been disposed of, the day of disposal.

The 45-day and 90-day periods also exclude days in which the trustee has materially diminished risks of loss or opportunities for gain, although the exclusion of those days is not taken to break the continuity of the period for which the trustee held the shares or interest in shares.

Beneficiaries of non-widely held trusts

For beneficiaries of non-widely held trusts, the holding period rule requires the beneficiary to hold the interest in the shares forming part of the trust estate 'at risk' for a continuous period of at least 45 days (90 days for preference shares) during the qualification period.

When a beneficiary has an interest in shares

A beneficiary (including a potential beneficiary of a discretionary trust) is taken to acquire, hold, or dispose of an interest in shares when the trustee of the non-widely held trust acquires, holds, or disposes of the shares or the interest in shares. This only applies to beneficiaries that are currently in existence at the time the trustee acquires, holds or disposes of the shares or the interest in shares.

When a person becomes a beneficiary of a non-widely held trust (including a potential beneficiary of a discretionary trust), that person is taken to have acquired an interest in any shares or interests forming part of the trust estate at that time. This applies to persons that became a beneficiary upon their birth or incorporation, or because of changes to the class of beneficiaries under the trust deed or by the trustee.

These persons will only be taken to have acquired an interest in one or more shares or interests forming part of the trust estate on the day they became a beneficiary (including a potential beneficiary) of the trust, including because of their birth or incorporation. A beneficiary is a potential beneficiary where they are capable of benefiting under the trust (for instance, where the trustee can exercise a discretion to distribute income or capital to them).

Similarly, when a person ceases to be a beneficiary of a non-widely held trust (including by ceasing to be a potential beneficiary of a discretionary trust), then that person is taken to have disposed of the interest in any shares forming part of the trust estate at that time.

Beneficiary's interest in shares is held at risk

A beneficiary holds an interest in shares forming part of the trust estate of a non-widely held trust 'at risk' where the beneficiary does not have materially diminished risks of loss or opportunities for gain in respect of the interest in the shares.

Where the non-widely held trust is a discretionary trust and the trustee has not made a family trust election (FTE), the beneficiaries of the trust are deemed to have a short position equal to their long position (in addition to any other positions the beneficiaries have in respect of their interests in the shares). The effect of this deeming is that beneficiaries of discretionary trusts that haven't made an FTE have materially diminished risks of loss or opportunities for gain. So, beneficiaries of discretionary trusts that haven't made an FTE don't hold an interest in the shares forming part of the trust estate 'at risk'.

If however the trustee of a discretionary trust has made an FTE, the beneficiaries are not deemed to have a short position equal to their long position. This means that any other positions the beneficiaries have with respect to their interest in shares are relevant. Provided the beneficiary doesn't have materially diminished risks of loss and opportunities for gain, the beneficiary will be taken to hold the interest in shares 'at risk'.

Beneficiary qualification period

Where the beneficiary holds an interest in the shares forming part of the trust estate of a non-widely held trust 'at risk', they will satisfy the holding period rule if they hold the interest for a continuous period of at least 45 days (90 days for preference shares) during the qualification period.

The qualification period for beneficiaries is generally the period beginning on the day after the beneficiary acquired the interest in the shares and ending on the 45th day (or 90th day for preference shares) after the day on which the interest became 'ex dividend'. The shares become 'ex-dividend' on the day after the last day on which the acquisition of a share will entitle the person to receive a dividend.

The 45-day and 90-day periods exclude days in which the beneficiary has materially diminished risks of loss or opportunities for gain, although the exclusion of those days is not taken to break the continuity of the period for which the beneficiary held the interest in shares.

It's noted that a beneficiary of a non-widely held trust (including a potential beneficiary of a discretionary trust) who was not born, or was not incorporated, during the qualification period won't hold the interest in shares for a continuous period of at least 45 days (90 days for preference shares) during the qualification period. This is even if the trustee has satisfied the holding period rule in their own right.

Similarly, a person that was not a beneficiary of the non-widely held trust (which also excludes a potential beneficiary of a discretionary trust) while the shares were part of the trust estate will not hold the interest in shares for a continuous period of at least 45 days (90 days for preference shares) during the qualification period.

Related payments rule

In certain circumstances, the related payments rule prevents a taxpayer from claiming the franking tax offset if a related payment is made. This rule applies if a taxpayer makes a 'related payment'. For instance, the taxpayer or an associate are under an obligation to pass on the benefit of the franked dividend to someone else.

The distribution by a trustee of a franked dividend to a presently entitled beneficiary doesn't constitute the making of a related payment.

Where there has been a related payment, to be a ‘qualified person’ for a dividend or distribution, the taxpayer must hold the relevant shares ‘at risk’ for the period beginning on the 45th day before and ending on the 45th day after the day on which the shares became ex-dividend (90 days before and after for preference shares).

Being a ‘qualified person’ for the payment of current dividends or distributions doesn't mean that the taxpayer is automatically a ‘qualified person’ for future dividends or distributions if the taxpayer or an associate are under an obligation to pass on those dividends or distributions to someone else. The related payments rule must be satisfied for all subsequent dividends and distributions.

Individual small shareholder exemption

If the trustee of a non-widely held trust satisfies the holding period rule and the related payments rule in relation to shares or an interest in shares forming part of the trust estate, then the beneficiary will also be taken to be a qualified person in relation to the shares or the interest in shares if the beneficiary is an individual and their total franking credit entitlement is below $5,000.

This is the case even if the beneficiary did not hold the interest in the shares 'at risk' for at least 45 days (or 90 days for preference shares) during the qualification period (because, for example, the shares were part of the trust estate of a discretionary trust that had not made an FTE).

A total franking credit entitlement of $5,000 is roughly equivalent to receiving a fully franked dividend of:

• $11,666 (for companies that are not base rate entities, with a corporate tax rate of 30%)
• $13,181 (for companies that are base rate entities, with a corporate tax rate of 27.5%)
• $14,230 (for companies that are base rate entities, with a corporate tax rate of 26%).

This exemption only applies to individuals, and does not apply to trustees, partnerships or companies.

Examples

The following examples set out how the holding period rule applies to trustees and beneficiaries of non-widely held trusts. It is assumed the related payments rule is not applicable to these examples.

 

 

 

 

 

More information

For more information about eligibility for the franking tax offset, see You and your shares 2025 (NAT 2632).