Edited version of your written advice

Authorisation Number: 1051325077771

Date of advice: 10 January 2018

Ruling

Subject: Payment of dividends

Question 1

Will a payment by Company A on behalf of the Trust be assessable income to Company B if the Trust resolution is declared?

Answer

Yes

This ruling applies for the following period:

1 July 2017 to 30 June 2018

The scheme commences on:

1 July 2017

Relevant facts and circumstances

● Three entities are involved in the scheme

● The Trust

● Company A, and

● Company B

● Company A has issued 100 ordinary shares

● The Directors of Company A are:

● Director X, and

● Director Z

● The Trust is the sole member of Company A

● The Trust has no bank account

● Company A has declared a fully franked dividend. The dividend will be paid directly to Company B at the request of the Trust

● Company B has issued 100 ordinary shares

● The Directors and joint member of Company B are:

● Director X, and

● Director Z

● Neither Company A nor Company B are listed on the stock exchange

● The Trust Deed (the Deed) names the Trustees as

● Director X, and

● Director Z

● The schedule attached to the Deed names the Primary Beneficiaries as

● Director X

● Director Z, and

● The children and remoter issue of each of them

● The Deed defines Beneficiaries as:

The Primary Beneficiaries and General Beneficiaries and includes any person or entity that may at any time come within the definition of a Primary Beneficiary or General Beneficiary, notwithstanding that the person or entity may not be in existence or may not have been within the definition of a class of Beneficiaries at the Date of this Deed.

● The Deed defines Primary Beneficiaries as:

The persons named or described as such in the Schedule.

● The Deed defines General Beneficiaries as:

Any and all of the following in both their personal capacity and in their capacity as trustee of any other trust at any time and form time to time:

a) The Primary Beneficiaries;

b) Any parent, grandparent, brother, sister, niece, nephew, Spouse, Child, grandchild, great-grandchild or further issue of any of the Primary Beneficiaries and their Spouses, Children, grandchildren and greatgrandchildren;

c) Any blood relative of, or person married to or living in a bona fide domestic relationship with, any of the persons in subparagraphs (a) and (b) …

d) An Eligible Company…

● The Deed defines Eligible Company as:

A corporation in which at least one share is beneficially held by any of the Beneficiaries or by the Trustee or the trustee of an Eligible Trust, or of which any one of the Beneficiaries is a director, except for a corporation listed on the stock exchange.

● The Deed states that trust income can be distributed or accumulated as the Trustee see fit:

a) To pay, apply or set aside such income to or for the benefit of any Beneficiary; or

b) To accumulate such income…

and each valid and effective determination under this clause is called a Distribution.

● The Deed states:

… the Trustee has the power at its absolute discretion without being required to give any reasons to:

(a) Pay, apply or accumulate on behalf of any one or more of the Beneficiaries in the proportions and in the manner as it thinks fit so much of the gross or net amount of a particular class or category of income or capital…

● The Deed states:

A Beneficiary the subject of a Distribution or Default Distribution has an immediate, vested and indefeasible interest to the income paid, applied or set aside on their behalf upon making of the determination or failing to do so in time.

● The Trust will issue a Resolution of the Trustees that resolves:

Pursuant to the Deed and any other power enabling the Trustee, the income of the Trust for the year ending 30 June 2018 is set aside for the benefit of the beneficiaries as follows: Company B.

Relevant legislative provisions

Division 6 of the Income Tax Assessment Act 1936

Subsection 6(1) of Income Tax Assessment Act 1936

Division 7A of Income Tax Assessment Act 1936

Section 44 of Income Tax Assessment Act 1936

Section 95 of Income Tax Assessment Act 1936

Section 98 of Income Tax Assessment Act 1936

Section 99A of Income Tax Assessment Act 1936

Section 102 of Income Tax Assessment Act 1936

Section 254 of Income Tax Assessment Act 1936

Section 6-1(1) of the Income Tax Assessment Act 1997

Section 6-5(1) of the Income Tax Assessment Act 1997

Subdivision 202-E of the Income Tax Assessment Act 1997

Division 207 of the Income Tax Assessment Act 1997

Reasons for decision

Question 1

Will a payment by Company A on behalf of the Trust be assessable income to Company B if the Trust resolution is declared?

Detailed reasoning

A Trust

A trust of property or income may be described as a fiduciary obligation imposed on a person (the trustee) to hold property or income for a particular purpose or purposes, or for the benefit of other persons or classes of persons who may or may not include the trustee. The fiduciary obligation may be imposed on the trustee either by the person establishing the trust (who may be the same as the trustee), by another person, by court order or declaration, or by operation of law. Although the trustee may hold the legal title to property etcetera, the trustee is compelled in equity to deal with it in accordance with the express or implied terms of the trust.

A trust for income tax purposes is property, or an interest in property, that is vested in and under the control of a person who is a trustee, and that produces income. A trust is comprised of three distinct parts; a settlor, trust object and a beneficiary.

A Beneficiary

Generally, a beneficiary will not be absolutely entitled to a trust asset if one or more other beneficiaries also have an interest in it.

If there is more than one beneficiary with interests in the trust asset, then it will usually not be possible for any one beneficiary to call for the asset to be transferred to them or to be transferred at their direction. This is because their entitlement is not to the entire asset.

A Trustee

The term "trustee" is defined in subsection 6(1) of the ITAA 1936 as follows:

Trustee in addition to every person appointed or constituted trustee by act of parties, by order, or declaration of a court, or by operation of law, includes:

a) an executor or administrator, guardian, committee, receiver, or liquidator; and

b) every person having or taking upon himself the administration or control of income affected by any express or implied trust, or acting in any fiduciary capacity, or having the possession, control or management of the income of a person under any legal or other disability;

Section 254 of the ITAA 1936 applies to make the trustee responsible for the income tax affairs of the monies and assets to which they have a fiduciary duty to control.

Section 254 of the ITAA 1936 provides that a trustee:

b) …shall in respect of that income, or those profits or gains, make the returns and be assessed thereon, but in his representative capacity only, and each return and assessment shall, except as otherwise provided by this Act, be separate and distinct from any other.

d) …is hereby authorized and required to retain from time to time out of any money which comes to him in his representative capacity so much as is sufficient to pay tax which is or will become due in respect of the income, profits or gains.

e) …is hereby made personally liable for the tax payable in respect of the income, profits or gains to the extent of any amount that he has retained, or should have retained, under paragraph (d); but he shall not be otherwise personally liable for the tax.

Present Entitlement

The term 'present entitlement' is a central concept in determining where the liability to tax falls under Division 6 of the ITAA 1936. This is because the method of taxing trust income depends on whether or not a taxpayer is 'presently entitled' to trust estate income.

In general, the term 'presently entitled' means that a beneficiary of a trust estate has a present or immediate right to demand payment of a share of the net trust income from the trustee. If the beneficiary has no vested indefeasible interest at a particular point in time then it is concluded that there is no beneficiary presently entitled to the income. In this situation the trustee will be assessed on such income under Division 6 of the ITAA 1936.

The Deed states that the Trustee has the power at its absolute discretion to pay, apply or accumulate on behalf of any one or more of the Beneficiaries in the proportions and in the manner it sees fit.

The Deed does not give the Trustee power to distribute income to anyone outside of the Beneficiaries.

Company B is considered to be a General Beneficiary as it is an Eligible Company; Director X and Director Z are directors. The Deed defines Beneficiaries as both Primary Beneficiaries and General Beneficiaries.

The Deed states a Beneficiary who is the subject of Distribution has an immediate, vested and indefeasible interest to the income paid, applied or set aside on their behalf upon making of the determination.

Therefore, when the Trust makes the resolution to pay the beneficiary, Company B, a distribution it becomes presently entitled as the company has the immediate, vested and indefeasible interest to the Trust income.

Dividends

Subdivision 202-E of the ITAA 1997 states a franking entity must issue a distribution statement to each member who receives a distribution, showing the amount of franking credit attached to the distribution and the extent to which it's franked.

There are no formal documentation requirements in relation to a franking entity’s decision to allocate a franking credit to a distribution. Provision of the distribution statement is evidence of the allocation.

Therefore, Company A must issue a distribution statement to the Trust when a dividend is paid, showing the amount of attached franking credit and the extent to which the dividend is franked.

Subsection 44(1) of the ITAA 1936 states that the assessable income of a shareholder of a company includes:

a) if the shareholder is a resident:

i. dividends (other than non-share dividends) that are paid to the shareholder by the company out of profits derived by it from any source; and

ii. all non-share dividends paid to the shareholder by the company.

For the purposes of this Act, a dividend paid out of an amount other than profits is taken to be a dividend paid out of profits.

As such, the Trust as a member/shareholder in receipt of dividends from Company A will receive a distribution statement. The dividend paid from Company A is assessable income under section 44 of the ITAA 1936 to the Trust.

Effect of receiving a franked distribution

The provisions that relate to the taxation of trust income are contained in Division 6 of Part III of the ITAA 1936.

By virtue of subsection 95(1) of the ITAA 1936 ‘net income’ in relation to a trust estate means the total assessable income of the trust estate less all allowable deductions. Under section 96 of the ITAA 1936 the Trustee of the Trust is not liable to pay tax on the net income of the trust except in specific circumstances. The circumstances are:

● Section 98 of the ITAA 1936 – when a ‘presently entitled’ beneficiary is under a legal disability

● Section 99A of the ITAA 1936 – where no person is ‘presently entitled’ to the net income, and

● Section 102 of the ITAA 1936 – where the settlor has created a ‘revocable trust’.

These specific circumstances do not apply to the Trust; as such the Trustee of the Trust is not liable to pay tax on dividends paid by Company A.

Division 207 of the ITAA 1997 requires a trustee receiving a franked dividend to include 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. The beneficiaries who are presently entitled include in their tax returns:

● their portion of the trust income (as determined under section 95 of the ITAA 1936), and

● their portion of the franking credit (under subsection 207-20(1) of the ITAA 1997).

Income

Under subsection 6-1(1) of the ITAA 1997 assessable income consists of ordinary income and statutory income. In subsection 6-5(1) of the ITAA 1997 ordinary income is defined by legislation as income according to ordinary concepts, which means derived from ordinary sources, for example salaries and wages, rental income, bank interest and dividends from investments.

Conclusion

Therefore, Company B, as a presently entitled Beneficiary of the Trust, should include the grossed up dividend (the dividend and franking credit) flowing from Company A and distributed by the Trust as ordinary income in their assessable income.

ATO view documents

Taxation Ruling TR 2003/8 Income tax: distributions of property by companies to shareholders - amount to be included as an assessable dividend

Taxation Ruling 2004/D25 Income tax: capital gains: meaning of the words 'absolutely entitled to a CGT asset as against the trustee of a trust' as used in Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997