ATO Interpretative Decision
ATO ID 2004/859
Income tax
Family Trust Distribution Tax: franking creditsFOI status: may be released
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This document incorporates revisions made since original publication. View its history and amending notices, if applicable.
This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Issue
Is the trustee of a family trust, which is liable for Family Trust Distribution Tax (FTDT) pursuant to Division 271 of Schedule 2F to the Income Tax Assessment Act 1936 (ITAA 1936) on a distribution to a beneficiary, able to use franking credits associated with that distribution to offset the FTDT?
Decision
No. The trustee of a family trust cannot use franking credits associated with a distribution which is subject to FTDT.
Facts
The trustee of a family discretionary trust elected to be a family trust in its tax return for the year ended 30 June 2000 to ensure the beneficiaries would be qualified persons in respect of Division 1A of Part IIIAA of the ITAA 1936.
During the year ended 30 June 2003, the trustee resolved to distribute $1,000 of its income to a distant relative who is not part of the family as defined in section 272-95 of Schedule 2F to the ITAA 1936. Franking credits of $60 were attached to the distribution. This represented the relative's proportionate share of the total franking credits included in the assessable income of the trust for the year ended 30 June 2003.
Because the distribution was made to a beneficiary outside the family, the trustee is liable to FTDT pursuant to section 271-15 of Schedule 2F to the ITAA 1936.
The FTDT was paid by the trustee.
Reasons for Decision
Subsection 207-35(4) of the Income Tax Assessment Act 1997 (ITAA 1997) ensures that a beneficiary of a trust, the trustee of which is neither a corporate tax entity nor a trustee of a complying superannuation entity, is assessed on any franking credits that are associated with a franked distribution that flows indirectly to the beneficiary as defined in subsection 207-50(3) of the ITAA 1997. A beneficiary is then entitled to a tax offset equal to the amount of the franking credits, through the operation of section 207-45 of ITAA 1997.
Where a trustee is liable for FTDT, section 271-105 of Schedule 2F to the ITAA 1936 will reduce the amount to be included in the assessable income of a beneficiary of the trust in accordance with the formula prescribed in subsection 271-105(2). Once the FTDT is fully paid, the whole amount is excluded from the assessable income of the beneficiary.
Subsection 207-50(3) of the ITAA 1997 ensures that, once the liability to the FTDT has been paid, a franked distribution does not flow indirectly to the beneficiary. This means that subsection 207-35(4) of the ITAA 1997 does not include the associated franking credits in assessable income and any entitlement the beneficiary may have otherwise had to those credits under section 207-45 of the ITAA 1997, is not available.
As with the beneficiary, the trustee is not assessable on the franking credits and is not entitled to a tax offset associated with those franking credits once the liability to the FTDT has been paid. This is because a franked distribution does not flow indirectly to the trustee as defined in subsection 207-50(4) of the ITAA 1997.
Amendment History
| Date of amendment | Part | Comment |
|---|---|---|
| 30 January 2015 | Facts | Minor wording |
| Reasons for decision | Change reference to Subsection 207-35(3) of the Income Tax Assessment Act 1997 to reflect amendment to legislation | |
| Legislative references | Include reference to Subsection 207-35(4) of the Income Tax Assessment Act 1997 |
Year of income: Year ended 30 June 2003
Legislative References:
Income Tax Assessment Act 1936
Division 1A of Part IIIAA
section 271-15, Schedule 2F
section 272-95, Schedule 2F
section 271-105, Schedule 2F
subsection 271-105(2), Schedule 2F
subsection 207-35(4)
section 207-45
section 207-50
subsection 207-50(2)
subsection 207-50(3)
subsection 207-50(4)
Keywords
Family trust distribution tax
Family trusts
Franking credits
Trust distributions
Trustees
Date reviewed: 22 January 2018
ISSN: 1445-2782
| Date: | Version: | |
| 25 October 2004 | Original statement | |
| You are here | 30 January 2015 | Updated statement |