Edited version of private advice

Authorisation Number: 1052217847431

Date of advice: 21 February 2024

Ruling

Subject: Excepted income - Imputation credits

Question 1

Is the income you receive from the Trust excepted income?

Answer

Yes.

Question 2

Are you eligible for a refund of any excess franking tax credits arising from the franked distributions you received from the Trust?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

The Deceased passed away several years ago.

The executors of their estate are two of their adult children - Child A and Child B.

In the Deceased's last will and testament, they bequeathed the following:

•         a portion of their estate to adult child A

•         a portion of their estate to adult child B

•         a portion of their estate to those of their grandchildren Grandchild A, Grandchild B, Grandchild C and Grandchild D who survive them and attain a certain age in equal shares as joint tenants.

Following the Deceased's death, a testamentary trust was created (the Trust).

No additional funds or assets have been introduced to the Trust since the death of the Deceased.

You have provided a list of assets held by the Trust.

You received franked distributions and franking credits from the Trust for the income year ending 30 June 20XX.

You were under the age of 18 years in the relevant income year.

You are not engaged in full time employment.

You do not have a disability.

Relevant legislative provisions

Income Tax Assessment Act 1936 Division 6AA

Income Tax Assessment Act 1936 section 95A(2)

Income Tax Assessment Act 1936 section 97

Income Tax Assessment Act 1936 section 100

Income Tax Assessment Act 1936 section 102AC

Income Tax Assessment Act 1936 section 102AE

Income Tax Assessment Act 1936 section 102AG

Income Tax Assessment Act 1997 Division 67

Income Tax Assessment Act 1997 section 67-25

Income Tax Assessment Act 1997 section 98

Income Tax Assessment Act 1997 Division 207

Income Tax Assessment Act 1997 Subdivision 207-B

Income Tax Assessment Act 1997 section 207-35

Income Tax Assessment Act 1997 section 207-37

Income Tax Assessment Act 1997 section 207-45

Reasons for decision

Question 1

Summary

You are required to include the amounts received from the Trust in your assessable income as a beneficiary of a trust under section 100 of the Income Tax Assessment Act 1936 (ITAA 1936). As the income satisfies the conditions set out in subparagraphs 102AG(2)(a)(i) and 102AG(2)(d)(i) of the ITAA 1936, it is excepted income.

Detailed reasoning

Division 6AA of the ITAA 1936 sets out special rules that apply in working out the income tax liability on the income of persons who are prescribed persons.

For the purposes of Division 6AA of the ITAA 1936, a person is a prescribed person in relation to a year of income if, on the last day of the year, the person is under 18 years of age and is not an excepted person. A person to whom Division 6AA applies is generally liable to pay tax at special rates on unearned income, whether derived directly or through a trust.

Where a beneficiary of a trust estate is a prescribed person in relation to a year of income, Division 6AA will not apply where the income of the trust is excepted trust income.

A person is an excepted person if they meet any of the following criteria:

•         They are engaged in a full-time occupation on the last day of the year of the income, subject to certain exceptions or

•         They are entitled to a child disability allowance or disability support pension in respect of a period that included the last day of the year of income or

•         They produce a medical certificate stating that he or she is a disabled child, or has a continuing inability to work within the meaning of the Social Security Act, or is permanently blind and this was the position on the last day of the year of income, or

•         Is a person:

o           In respect of whom a double orphan's pension was, or but for a repatriation pension being payable would have been, payable for a period that included the last day of the year of income, or

o           Who, on the basis of a medical certificate, appears at the end of the year of income unlikely, by reason of a permanent disability, to be able to engage in a full-time occupation,

•         and who was not wholly or substantially dependent for support, for the whole of the relevant period, on a relative or relatives.

In accordance with paragraph 102AG(2)(a) of the ITAA 1936, an amount will be excepted trust income in relation to a beneficiary of the trust estate to the extent that it resulted from a will, codicil or an order of a court that varied or modified the provisions of a will or codicil. Under paragraph 102AG(2)(d), income derived from the investment of amounts that devolved for the benefit of beneficiaries from a deceased estate is also excepted trust income. Subsection 102AG(8) of the ITAA 1936 is an anti-avoidance provision that ensures that amounts received by the trust from other sources, or income from the investment of those amounts, is not excepted trust income.

Paragraph 102AE(2)(e), subsection 102AE(4) and section 102AG of the ITAA 1936 operate together to ensure an amount included in the assessable income of a prescribed person under section 97 or section 100 of the ITAA 1936 will be excepted assessable income and excluded from the operation of Division 6AA to the extent that it is excepted trust income under section 102AG.

Amounts included in assessable income

Subsection 100(1) of the ITAA 1936 provides that

The assessable income of any beneficiary who:

(a) is under a legal disability or is under a legal disability or is deemed to be presently entitled to any of the income of a trust estate by virtue of the operation of subsection 95A(2) of the ITAA 1936; and;

(b) is a beneficiary in more than one trust estate or derives income from any other source;

shall include:

(c) so much of the individual interest of the beneficiary in the net income of the trust estate or of each of the trust estates as is attributable to a period when the beneficiary was a resident

Subsection 100(1AA) of the ITAA 1936 provides that:

For the purposes of paragraph 100(1)(b) of the ITAA 1936, if an amount is included in the assessable income of a beneficiary of a trust estate because of Subdivision 207-B of the Income Tax Assessment Act 1997 (ITAA 1997), treat the beneficiary as deriving income from another source.

Section 207-35 of the ITAA 1997 (part of Subdivision 207-B) provides that where a beneficiary receives franked distributions from a trust, they are required to include the franking credit and franked distributions in their assessable income.

Application to your circumstances

For the ruling period, you meet the definition of a prescribed person as you are under a legal disability and not an excepted person.

Subsection 100(1AA) of the ITAA 1936 deems that you receive income from a source other than the Trust because you receive franked distributions and franking credits. As a result, you are required to include these amounts in your assessable income under section 100 of the ITAA 1936.

That income is derived from amounts that devolved to the trust under a will. No further funds have been added to the trust from other sources. The amount received is therefore excepted trust income under section 102AG of the ITAA 1936.

As the amounts included in the assessable income under section 100 of the ITAA 1936 are excepted trust income under section 102AG of the ITAA 1936, they are excepted assessable income and excluded from the operation of Division 6AA of the ITAA 1936 in accordance with section 102AE of the ITAA 1936.

Question 2

Summary

You are eligible for a refund of any excess franking credits received where the amount is greater than any tax payable on your assessable income.

Detailed reasoning

Division 207 of the ITAA 1997 sets out the consequences of an entity receiving directly or indirectly a franked distribution from a corporate tax entity. As a general rule, for the income year in which the distribution is made, the recipient of a franked distribution:

a) includes in assessable income the amount of the franking credit on the distribution. This is in addition to any other amount included in the recipient's assessable income in relation to the distribution itself; and

b) is entitled to a tax offset equal to the franking credit.

Sections 207-35 and 207-37 of the ITAA 1997 provide that a beneficiary who receives a franked distribution from a trust includes the franked distribution and the franking credit that relates to it in their assessable income. Section 207-45 of the ITAA 1997 provides that they will be entitled to a tax offset equal to their share of the franking credit.

Holders who are entitled to a tax offset under Division 207 of the ITAA 1997, in respect of franking credits received, will also be subject to the refundable tax offset rules in Division 67, unless specifically excluded from the refundable tax offset rules under section 67-25 of the ITAA 1997.

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 of the ITAA 1997 (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).

Application to your situation

You received franking credits and franked dividends as distributions from the Trust. You are not excluded from receiving a refund of the excess franking tax offsets in accordance with section 67-25 of the ITAA 1997.

Therefore, you are entitled to receive a tax offset equal to the franking credits received and if the amount of franking credits is greater than your tax payable, you will receive a refund of the franking credits.