Edited version of private ruling

Authorisation Number: 1011756397831

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

Subject: Trust distribution of fully franked dividend

Question 1

Is the trustee of the trust not liable to pay income tax under section 98 of the Income Tax Assessment Act 1936 (ITAA 1936) on the distribution of a fully franked dividend to a non-resident beneficiary?

Answer

Yes

Question 2

Is a non-resident beneficiary not liable to pay income tax under section 98A of the ITAA 1936 on the receipt of a distribution from the trust, which consists of a fully franked dividend?

Answer

Yes

Question 3

Are the remaining resident beneficiaries not liable under section 97 of the ITAA 1936 to pay income tax on the distribution of trust income consisting of a fully franked dividend, to a non-resident beneficiary?

Answer

Yes

This ruling applies for the following period:

Year ended 30 June 2011

The scheme commences on:

1 July 2010

Relevant facts and circumstances

The trust is a discretionary family trust.

One of beneficiaries of the trust is a non-resident of Australia. The remaining beneficiaries are residents of Australia.

The trust holds all of the ordinary shares in an Australian resident company.

The company intends to declare and pay an amount of a fully franked dividend to the trust in the current financial year. The trust does not expect to receive any other income in the current financial year.

The trust deed contains a clause which allows the trustee to make individuals presently entitled to distributions from the trust.

The trustee intends to distribute all of the fully franked dividend and its associated franking credits to the non-resident beneficiary.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 95,

Income Tax Assessment Act 1936 Section 97,

Income Tax Assessment Act 1936 Section 98,

Income Tax Assessment Act 1936 Section 98A,

Income Tax Assessment Act 1936 Section 128B,

Income Tax Assessment Act 1936 Section 128C,

Income Tax Assessment Act 1936 Section 128D,

Income Tax Assessment Act 1997 Section 6-10,

Income Tax Assessment Act 1997 Section 6-15 and

Income Tax Assessment Act 1997 Section 10-5.

Reasons for decision

Question 1

Summary

Is the trustee of the trust not liable to pay income tax under section 98 of the ITAA 1936 on the distribution of a fully franked dividend to a non-resident beneficiary?

Although the trustee is assessed in respect of the fully franked dividend being distributed to the non-resident, the trustee is not liable pay income tax on the distribution of non-assessable non-exempt net trust income.

Detailed reasoning

Trustee Assessment

Subsection 98(2A) of the ITAA 1936 provides that where a non-resident beneficiary is presently entitled to a share of the income of the trust estate, the trustee is assessed and liable to pay tax under subsection 98(3) of the ITAA 1936. The liability is in respect of so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was not a resident and is also attributable to sources in Australia.

In this case, the trust expects to receive a fully franked dividend in the current financial year from a resident Australian company. Once the dividend has been declared and received, the trust deed allows the trustee to make the non-resident beneficiary presently entitled to this dividend income.

Section 98 of the ITAA 1936 will assess the trustee in respect of the dividend distributed to the non-resident at the appropriate non-resident rates as though it is assessed in the hands of the beneficiary.

Taxation of Trustee

The net income of a trust estate is defined in subsection 95(1) of the ITAA 1936 as the total assessable income of the trust estate calculated as if the trustee were a taxpayer in respect of that income and were a resident, less all allowable deductions.

Under subsection 128B(1) of the ITAA 1936 there is a liability to withholding tax on dividend income paid to a non-resident. Under subsection 128C(1) of the ITAA 1936, the withholding tax is due and payable by the trustee. However, paragraph 128B(3)(ga) of the ITAA 1936 excludes franked dividends from withholding tax.

Section 128D of the ITAA 1936 provides that a dividend upon which withholding tax is payable or would have been payable if not for paragraph 128B(3)(ga) of the ITAA 1936, is not assessable income and is not exempt income. Subsection 6-15(3) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that if an amount is non-assessable non-exempt income then it is not assessable income.

In this case, the fully franked dividend income is non-assessable non-exempt income. This means it is not included in the net income of the trust, and it is not include in the trustee's assessable income.

Although the trustee is assessed under section 98 of the ITAA 1936 in respect of the fully franked dividend being distributed to the non-resident, the trustee is not liable pay income tax on the distribution of non-assessable non-exempt net trust income.

Question 2

Summary

Is a non-resident beneficiary not liable to pay income tax under section 98A of the ITAA 1936 on the receipt of a distribution from the trust, which consists of a fully franked dividend?

The fully franked dividend income is non-assessable non-exempt income. This means it is not included in the non-resident beneficiary's assessable income.

Detailed reasoning

Non-resident beneficiary assessment

Subsection 6-10(5) of the ITAA 1997 provides that the assessable income of a non-resident taxpayer includes statutory income from all Australian sources and other statutory income that a provision includes on some basis other than having an Australian source.

Section 10-5 of the ITAA 1997 lists those provisions about statutory income. Included in this list is section of 98A of the ITAA 1936.

Subsections 98(2A) & 98(3) of the ITAA 1936 provide that where a beneficiary is a non-resident at the end of the year of income and is presently entitled to a share of income from a trust estate, the trustee is liable to pay tax on that share.

In addition, section 98A of the ITAA 1936 provides that where a trustee is assessed in terms of subsection 98(3) of the ITAA 1936 on behalf of a non-resident beneficiary, the assessable income of that beneficiary shall include this amount.

In this case, the trust expects to receive a fully franked dividend in the current financial year from a resident Australian company. Once the dividend has been declared and received, the trust deed allows the trustee to make the non-resident beneficiary presently entitled to this dividend income.

The trustee is assessed under section 98 of the ITAA 1936 in respect of the dividend being distributed to the non-resident beneficiary. Accordingly, section 98A of the ITAA 1936 requires the non-resident beneficiary to include the dividend distribution in their assessable income.

Taxation of non-resident beneficiary

Under subsection 128B(1) of the ITAA 1936 there is a liability to withholding tax on dividend income paid to a non-resident. However, franked dividends paid to non-residents are excluded from the withholding tax provisions under paragraph 128B(3)(ga).

Section 128D of the ITAA 1936 provides that a dividend upon which withholding tax is payable or would have been payable if not for paragraph 128B(3)(ga) of the ITAA 1936, is not assessable income and is not exempt income. Subsection 6-15(3) of the ITAA 1997 provides that if an amount is non-assessable non-exempt income then it is not assessable income.

In this case, the fully franked dividend income is non-assessable non-exempt income. This means it is not included in the non-resident beneficiary's assessable income under section 98A of the ITAA 1936.

Question 3

Summary

Are the remaining resident beneficiaries not liable under section 97 of the ITAA 1936 to pay income tax on the distribution of trust income consisting of a fully franked dividend, to a non-resident beneficiary?

The trust deed allows the trustee to make the non-resident beneficiary presently entitled to the dividend income. When this occurs, no other beneficiary will be presently entitled to the trust income. This means the remaining resident beneficiaries are not assessable on any share of net trust income.

Detailed reasoning

Subsection 97(1) of the ITAA 1936 provides that where a beneficiary of a trust estate who is not under any legal disability and is presently entitled to a share of the net income of the trust estate, the assessable income of the beneficiary includes:

n so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was a resident, and

n so much of that share of the net income of the trust estate as is attributable to a period where the beneficiary was not a resident and is also attributable to sources in Australia.

In this case, the trust expects to receive a fully franked dividend in the current financial year from a resident Australian company. Once the dividend has been declared and received, the trust deed allows the trustee to make the non-resident beneficiary presently entitled to this dividend income. When this occurs, no other beneficiary will be presently entitled to the trust income.

This means the remaining beneficiaries are not assessable on any share of net trust income under section 97 of the ITAA 1936.

Disclaimer

You cannot rely on the rulings in the Register of private binding rulings in your tax affairs. You can only rely on a private ruling that we have given to you (or to someone acting on your behalf).

The Register of private binding rulings is a public record of private rulings issued by the Tax Office. The Register is an historical record of rulings, and we do not update it to reflect changes in the law or our policies.

The rulings in the Register have been edited and may not contain all the factual details relevant to each decision. Do not use the Register to predict Tax Office policy or decisions.