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Edited version of private advice
Authorisation Number: 1012684099450
Ruling
Subject: Child trust beneficiary franked dividend income
Questions and Answers:
1. Must you lodge an individual tax return for your trust income?
Yes.
2. Can you claim excess franking credits?
Yes.
3. Can the Medicare levy paid by the trustee be deducted from your income tax return?
Yes.
This ruling applies for the following periods:
Year ended 30 June 2012
Year ended 30 June 2013
The scheme commences on:
1 July 2011
Relevant facts and circumstances
You are a child beneficiary of a discretionary testamentary trust (the Trust), which was created from a will for the primary benefit of your grandparent and has a family trust election in force for the relevant income years of this private ruling.
Your only source of income is from the testamentary trust, which includes franked dividends.
Relevant legislative provisions
Income Tax Assessment Act 1936 Section 95AAA
Income Tax Assessment Act 1936 Section 98
Income Tax Assessment Act 1936 Section 100
Income Tax Assessment Act 1936 Section 101
Income Tax Assessment Act 1936 Section 160APHL
Income Tax Assessment Act 1997 Section 67-25
Income Tax Assessment Act 1997 Subdivision 207-B
Reasons for decision
Lodging an individual tax return
For the 2010-11 and later income years, section 95AAA of the ITAA 1936 provides a simplified outline of the relationship between Division 6, Division 6E and Subdivisions 115-C and 207-B of the Income Tax Assessment Act 1997 (ITAA 1997). Of relevance to your private ruling, it states:
Division 6E modifies the operation of this Division for the purpose of excluding amounts relevant to…franked distributions and franking credits from the calculations of assessable amounts under sections…98…and 100.
Subdivision 207-B of that Act has the effect that an amount corresponding to each of those franked distributions is taxed in the hands of the beneficiaries of the trust and, if necessary, the trustee. It also has the effect that the entity in whose hands those distributions are taxed can take advantage of the relevant amount of related franking credits.
In terms of the operation of Division 6 of the ITAA 1936, of relevance to your private ruling:
• Section 101 of the ITAA 1936 provides a beneficiary shall be presently entitled where a trustee exercises their discretion to apply income of a trust estate for the benefit of the beneficiary.
• Section 98 of the ITAA 1936 provides where a beneficiary of a trust estate who is under a legal disability is presently entitled to a share of the income of the trust estate, the trustee of the trust estate shall be assessed and liable to pay tax in respect of so much of that share of the net income of the trust estate as is attributable to the beneficiary.
• Subsection 100(1AA) of the ITAA 1936 provides if an amount (comprised of franked dividends and franking credits) is included in the assessable income of a beneficiary of a trust estate because of Subdivision 207-B of the Income Tax ITAA 1997, to treat the beneficiary as deriving income from another source.
• Subsection 100(1) of the ITAA 1936 provides where a beneficiary who is under a legal disability derives income from any other source, the beneficiary shall be assessed in their personal income tax return.
In your case, because you a presently entitled beneficiary under legal disability receiving franked dividend income, subsection 100(1) of the ITAA 1936 requires you to lodge all of your assessable income (from all sources) in a personal income tax return.
Excess franking credits
As a general rule, section 67-25 of the ITAA 1997 provides taxpayers are entitled to a refund of their tax offsets available under Division 207 (which sets out the effects of receiving a franked distribution), unless otherwise stated in that section. For example, subsection 67-25(1B) of the ITAA 1997 does not entitle a trust to a refund of franking credits where it is liable to be assessed under section 98 of the ITAA 1997 (since that would result in both the beneficiary and the trust obtaining the same refund).
Also, subsection 160APHL(10) of the ITAA 1936 provides where a trust beneficiary receives franked distributions, to be entitled to tax offsets under Division 207 of the ITAA 1997, the trust must be: (a) a family trust within the meaning of Schedule 2F of the ITAA 1936; (b) an employee share trust; or (c) a trust resulting from the administration of a deceased estate (which does not include a testamentary trust that arises after the 3 income year administration period has ceased).
Section 272-75 in Schedule 2F of the ITAA 1936 states a trust is a family trust at any time when a family trust election (see subsection 272-80(1)) in respect of the trust is in force. Subsection 272-80(1) states, subject to this section, the trustee of the trust may make an election (the family trust election) in accordance with this section that the trust is a family trust for the purposes of this Schedule at all times after the beginning of a specified income year.
In your case (assuming the family trust election made by the Trust is in accordance to subsection 272-80(1) of the ITAA 1936), section 160APHL of the ITAA 1936 and section 67-25 of the ITAA 1997 entitle you to use and obtain a refund of excess franking credits.
Medicare Levy
Subsection 100(2) of the ITAA 1936 provides there shall be deducted from the income tax assessed against a beneficiary to whom subsection (1) applies, or a beneficiary under a legal disability whose assessable income is increased as a result of Subdivision 207-B of the ITAA 1997, the tax paid or payable by any trustee in respect of that beneficiary's interest in the net income of the trust estate.
In your case, when you lodge a personal income tax return for the years ended 30 June 2012 and 2013, you should include at Item 13S the 'share of credit for tax paid by trustee'. This will result in a credit applied to your personal income tax return for the Medicare Levy paid by the trustee.
Conclusion
In conclusion, by lodging a personal income tax return: (i) the tax and Medicare Levy paid under section 98 of the ITAA 1936, by the Trust, will be credited to your income tax assessment; and (ii) your assessment (and not the Trustee's) will receive a refund of the excess franking credits.
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