Edited version of private advice

Authorisation Number: 1052391645288

Date of advice: 15 May 2025

Ruling

Subject: Not assessable and not exempt income

Question 1

Does subsection 768-5(2) of the Income Tax Assessment Act 1997 apply to treat an amount of the net income of Trust A that would otherwise be included in the assessable income of Company X because of Division 6 of Part III of the income Tax Assessment Act 1936 as not assessable income and not exempt income of Company X?

Answer

Yes

Question 2

If the answer to question 1 is yes, is the amount of $amount the portion of the net income of Trust A that is not assessable income and not exempt income of Company X pursuant to subsection 768-5(2) of the Income Tax Assessment Act 1997 for the year ended DD MM YYYY?

Answer

No

This ruling applies for the following period:

Income year ended DD MM YYYY

The scheme commenced on:

DD MM YYYY

Relevant facts and circumstances

Trust A

Trust A was established by a deed of trust in MM YYYY. The deed of trust was amended by a variation deed executed on DD MM YYYY. These two documents together are the Trust Deed.

The Trust deed defines beneficiaries and income of Trust A.

Individual A and another family member are joint appointors of Trust A.

The trustee of Trust A is Company Y.

Individual A is the sole director of Company Y and owns 100% of a class of shares in Company Y.

Another class of shares in Company Y is owned by three of other family members of Individual A. These three family members each own one shares in this class of shares. This class of shares have no rights prior to Individual A's passing.

Trust A has a range of income producing investments including equity in an Australian company, a foreign company (Company Z) and 100% ownership in a number of residential properties.

Trust A also receives each year distributions from two family trusts.

Company X

Company X is a company incorporated in Australia on DD MM YYYY.

Company Y as trustee of Trust A is the sole member of Company X and Individual A is the sole director.

Company X is a beneficiary of Trust A by virtue of Individual A's role as director of the company pursuant to the definitions in the Trust Deed.

Resolution of Sole Director

By resolution executed DD MM XXXX (resolution of sole director), Individual A as sole director of the Trustee determined that the income of Trust A for the financial year XXXX (FY XX) would be calculated as taxable income of Trust A.

Individual A also determined that the income of Trust A for FY XX would be separated into three categories being Category A, Category B and Other Income.

Company X was made entitled to 100% of the Other Income category for FY XX.

Income of Trust A

In FY XX, Trust A income was $amount, comprising $amount of Category A and $amount of Other Income. There were no Category B amounts.

Category A amounts are franked distributions from Company X to Trust A.

Included in the income of Trust A is a dividend from Company Z received on a date after the Resolution of Sole Director was executed.

Company Z

Company Z is a foreign company.

Company Y as the trustee of Trust A held XXX ordinary shares in Company Z at the end of FY XX. There were XXX Company Z ordinary shares issued at the end of FY XX.

The directors of Company Z include Individual A and another family member along with two other individuals.

By resolution executed on a date after the Resolution of Sole Director was executed, a dividend of $amount was declared by Company Z.

On the date the Company Z dividends were declared, Company Y as the Trustee held XXX ordinary shares of Company Z.

Company Z is not entitled to deduct any part of the dividend in working out its taxable income for the foreign country tax purposes.

Relevant legislative provisions

Income Tax Assessment Act 1936subsection 6(1)

Income Tax Assessment Act 1936division 6

Income Tax Assessment Act 1936subsection 95(1)

Income Tax Assessment Act 1936subsection 97(1)

Income Tax Assessment Act 1936section 350

Income Tax Assessment Act 1936section 351

Income Tax Assessment Act 1997division 207

Income Tax Assessment Act 1997subdivision 207-B

Income Tax Assessment Act 1997subsection 207-35(4)

Income Tax Assessment Act 1997section 207-37

Income Tax Assessment Act 1997section 768-1

Income Tax Assessment Act 1997subsection 768-5(2)

Income Tax Assessment Act 1997subsection 768-5(3)

Income Tax Assessment Act 1997section 768-10

Income Tax Assessment Act 1997section 768-15

Income Tax Assessment Act 1997section 960-100

Income Tax Assessment Act 1997section 960-115

Income Tax Assessment Act 1997section 960-120

Income Tax Assessment Act 1997subsection 960-185(1)

Income Tax Assessment Act 1997subsection 960-185(2)

Income Tax Assessment Act 1997section 960-190

Income Tax Assessment Act 1997section 974-70

Income Tax Assessment Act 1997subsection 974-75(1)

Income Tax Assessment Act 1997subsection 995-1(1)

Does IVA apply to this private ruling?

Part IVA of the Income Tax Assessment Act 1936 contains anti-avoidance rules that can apply in certain circumstances where you or another taxpayer obtains a tax benefit, imputation benefit or diverted profits tax benefit in connection with an arrangement.

If Part IVA applies, the tax benefit or imputation benefit can be cancelled (for example, by disallowing a deduction that was otherwise allowable) or you or another taxpayer could be liable to the diverted profits tax.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies, we will need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website ato.gov.au and enter 'part IVA general' in the search box on the top right of the page, then select 'Part IVA: the general anti-avoidancerule for income tax'.

Reasons for decision

Issue 1

Question 1

Summary

Subsection 768-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) applies to treat an amount of the net income of Trust A that would otherwise be included in the assessable income of Company X because of Division 6 of Part III of the Income Tax Assessment Act 1936 (ITAA 1936) as not assessable income and not exempt income (NANE) of Company X.

Detailed reasoning

Subdivision 768-A of the ITAA 1997

According to the guide in section 768-1 of the ITAA 1997, Subdivision 768-A will operate to treat a distribution as NANE for an Australian corporate tax entity if:

   (a) n Australian corporate tax entity receives a foreign equity distribution from a foreign company, either directly or indirectly through one or more interposed trusts or partnerships; and

   (b) the Australian corporate tax entity holds a participation interest of at least 10% in the foreign company.

Subsection 768-5(2) of the ITAA 1997 deals with foreign equity distributions received by Australian resident corporate tax entities through interposed trusts, and provides that:

An amount is not assessable income, and is not exempt income, of an entity if:

   (a) the entity is a beneficiary of a trust or a partner in a partnership, an Australian resident and a corporate tax entity; and

   (b) the amount is all or part of the net income of the trust or partnership that would, apart from this subsection, be included in the entity's assessable income because of:

      (i) Division 276; or

      (ii) Division 5 or 6 of Part III of the Income Tax Assessment Act 1936; and

   (c) the amount can be attributed (either directly or indirectly through one or more interposed trusts or partnerships that are not corporate tax entities) to a foreign equity distribution; and

   (d) at the time the distribution is made, the entity satisfies the participation test in section 768-15 in relation to the company that made the distribution; and

   (e) the entity:

      (i) does not receive the distribution in the capacity of a trustee; or

      (ii) receives the distribution in the capacity of a trustee of a public trading trust; and

   (f) the distribution is not one to which section 768-7 (which is about foreign income tax deductions) applies.

Further, subsection 768-5(3) of the ITAA 1997 provides that:

An amount that is non-assessable non-exempt income under subsection [768-5](2) is taken, for the purpose of section 25-90 (about deductions relating to foreign non-assessable non-exempt income) to be derived from the same source as the foreign equity distribution.

(a) Entity is a beneficiary of a trust, an Australian resident and a corporate tax entity

Entity

According to subsection 995-1(1) of ITAA 1997, 'entity' has the meaning given by section 960-100 of ITAA 1997.

Section 960-100 of ITAA 1997 relevantly provides that:

960-100(1)

Entity means any of the following:

...

   (b) a body corporate;

...

   (f) trust;

...

Note:

The term entity is used in a number of different but related senses. It covers all kinds of legal persons, and other things, that in practice are treated as having a separate identity in the same way as a legal person does.

...

960-100(2)

The trustee of a trust, of a superannuation fund or of an approved deposit fund is taken to be an entity consisting of the person who is the trustee, or the persons who are the trustees, at any given time.

Note 1:

This is because a right or obligation cannot be conferred or imposed on an entity that is not a legal person.

Note 2:

The entity that is the trustee of a trust or fund does not change merely because of a change in the person who is the trustee of the trust or fund, or persons who are the trustees of the trust or fund.

...

960-100(4)

If a provision refers to an entity of a particular kind, it refers to the entity in its capacity as that kind of entity, not to that entity in any other capacity.

Example:

A provision that refers to a company does not cover a company in a capacity as trustee, unless it also refers to a trustee.

Therefore, both Company X and Trust A are an 'entity' within the meaning of that term in section 960-100 of the ITAA 1997.

Beneficiary of a trust

Under the definitions of the Trust Deed, beneficiary of Trust A includes Company X. Company X also benefits under Trust A in the FY XX by virtue of its entitlement to all Other Income of Trust A.

As such, Company X is a beneficiary of Trust A.

Australian resident

Subsection 995-1(1) of the ITAA 1997 defines 'Australian resident' to mean:

a person who is a resident of Australia for the purposes of the Income Tax Assessment Act 1936.

Subsection 6(1) of the ITAA 1936 relevantly states that:

In this Act, unless the contrary intention appears:

...

resident or resident of Australia means:

...

A company which is incorporated in Australia, or which, not being incorporated in Australia, carries on business in Australia, and has either its central management and control in Australia, or its voting power controlled by shareholders who are residents of Australia.

Company X is an Australian resident as it is a company incorporated in Australia.

Corporate tax entity

Section 960-115 of the ITAA 1997 relevantly states the following in relation to the meaning of 'corporate tax entity':

An entity is a corporate tax entity at a particular time if:

   (a) the entity is a company at that time...

Company X is a corporate tax entity as it is a company.

Considering the above, Company X is an entity that is a beneficiary of a trust, an Australian resident and a corporate tax entity.

(b) Net Income of the Trust included in Assessable income

According to subsection 995-1(1) of the ITAA 1997, net income of a trust has the same meaning as in Division 6 of Part III of the ITAA 1936.

Subsection 95(1) in Division 6 of Part III of the ITAA 1936 provides that:

net income, in relation to a trust estate, means the total assessable income of the trust estate calculated under this Act as if the trustee were a taxpayer in respect of that income and were a resident, less all allowable deductions, except deductions under Division 393 of the Income Tax Assessment Act 1997 (Farm management deposits) and except also, in respect of any beneficiary who has no beneficial interest in the corpus of the trust estate, or in respect of any life tenant, the deductions allowable under Division 36 of the Income Tax Assessment Act 1997 in respect of such of the tax losses of previous years as are required to be met out of corpus.

A trust may be required to work out its net income in a special way by Division 266 or 267 in Schedule 2F to this Act or Division 275 of the Income Tax Assessment Act 1997.

Division 6 of Part III of the ITAA 1936 deals with trust income. Subsection 97(1) of the ITAA 1936, which is under Division 6 of the ITAA 1936, provides:

Subject to Division 6D, where a beneficiary of a trust estate who is not under any legal disability is presently entitled to a share of the income of the trust estate:

   (a) the assessable income of the beneficiary shall include:

      (i) 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

...

By executing the Resolution of Sole Director, Individual A as sole director of the Trustee company determined that the income of Trust A for the FY XX would be calculated as taxable income of Trust A excluding notional amounts such as franking credit gross ups. Individual A also determined that the income of Trust A for FY XX would be separated into three categories being Category A, Category B and Other Income. Company X was made entitled to 100% of the Other Income category for FY XX.

In FY XX, Trust A income was $amount, comprising $amount of Category A and $amount of Other Income. There were no Category B amounts.

Trust A has a range of income producing investments including equity in an Australian company, a foreign company (Company Z) and 100% ownership in a number of residential properties.

Trust A also received each year distributions from two family trusts.

For FY XX, as there were no Category B amounts, other than Category A, all other income received by Trust A were part of Trust A's Other Income category. Trust A's Other Income for FY XX included the dividend distribution made by Company Z to Trust A.

Company X was an Australian tax resident throughout FY XX. Company X as a beneficiary of Trust A is not under any legal disability and was made presently entitled to Trust A's Other Income.

The Company Z dividend amount received by Trust A formed part of the Other Income of Trust A for FY XX. Company X was made presently entitled to this Other Income. Therefore, that part of the Company Z dividend, which would, apart from subsection 768-5(2) of the ITAA 1997, be included in Company X's assessable income because of Division 6 of Part III of the ITAA 1936 is not assessable income and is not exempt income.

(c) Amount Attributed to foreign equity distribution

Section 768-10 of the ITAA 1997 defines a 'foreign equity distribution' as:

a distribution or non-share dividend made by a company that is not a Part X Australian resident (within the meaning of Part X of the ITAA 1936) in respect of an equity interest in the company.

Section 960-120 of the ITAA 1997 relevantly defines a 'distribution' (made by a corporate tax entity that is a company) as:

a dividend, or something that is taken to be a dividend under this Act.

Further, subsection 960-120(2) of the ITAA 1997 provides that:

A corporate tax entity makes a distribution in the form of a dividend on the day on which the dividend is paid, or taken to have been paid.

'Dividend' is defined in subsection 995-1(1) of the ITAA 1997 as having:

the meaning given by subsections 6(1) and (4) and 6BA(5) and section 94L of the Income Tax Assessment Act 1936.

Subsection 6(1) of ITAA 1936 relevantly provides that 'dividend' includes:

   (a) any distribution made by a company to any of its shareholders, whether in money or other property; and

   (b) any amount credited by a company to any of its shareholders as shareholders.

In relation to the meaning of 'equity interest', subsection 995-1(1) of the ITAA 1997 provides that:

equity interest in an entity has the meaning given by:

   (a) in the case of a company - Subdivision 974-C.

In relation to the term 'equity interest in a company', section 974-70 of the ITAA 1997 provides as follows:

Scheme giving rise to equity interest

974-70(1)

A scheme gives rise to an equity interest in a company if, when the scheme comes into existence:

   (a) he scheme satisfies the equity test in subsection 974-75(1) in relation to the company because of the existence of an interest; and

   (b) the interest is not characterised as, and does not form part of a larger interest that is characterised as, a debt interest in the company, or a connected entity of the company, under Subdivision 974-B.

Note 1:

An equity interest can also arise under subsection (2) if a notional scheme with the combined effect of a number of related schemes would give rise to an equity interest under this subsection. To do this, the notional scheme would need to satisfy paragraph (b). This means that the related schemes will not give rise to an equity interest if the notional scheme would be characterised as (or form part of a larger interest that would be characterised as) a debt interest in the company or a connected entity.

Note 2:

An equity interest can also arise under section 974-80 (arrangements for funding return through connected entities).

Note 3:

Section 974-95 defines various aspects of the equity interest that arises.

Subsection 995-1(1) defines a 'scheme' as:

...

   (a) any arrangement; or

   (b) any scheme, plan, proposal, action, course of action or course of conduct, whether unilateral or otherwise.

Note:

The Commissioner may determine that, for the purposes of the debt and equity interest rules in Division 974, what would otherwise be a single scheme is to be treated as 2 or more separate schemes, and that the schemes are not related; see section 974-150.

Subsection 995-(1) of the ITAA 1997 also defines 'arrangement' to mean:

... any arrangement, agreement, understanding, promise or undertaking, whether express or implied, and whether or not enforceable (or intended to be enforceable) by legal proceedings.

Subsection 974-75(1) of the ITAA 1997 sets out the conditions that must be satisfied for an 'equity interest' in a company and relevantly provides as follows:

A scheme satisfies the equity test in this subsection in relation to a company if it gives rise to an interest set out in the following table:

Table 1: Equity interests

The distribution made by Company Z to Trust A is a 'dividend' in relation to an equity interest in Company Z, as Company Y as the Trustee was a shareholder of Company Z when the distribution was made. Company Z is not a Part X Australian resident.

Therefore, the dividend distribution made by Company Z falls within the meaning of 'foreign equity distribution'.

Company X was presently entitled to all Other Income of Trust A for FY XX. Trust A's Other Income for FY XX included the distribution made by Company Z.

Therefore, the Company Z distribution amount can be attributed indirectly through Trust A to a foreign equity distribution.

(d) The participation test

Section 768-15 of the ITAA 1997 provides that:

An entity satisfies the participation test in this section in relation to another entity at a time if, at that time, the sum of the following is at least 10%:

   (a) the direct participation interest the entity would have in the other entity if rights on winding-up were disregarded;

   (b) the indirect participation interest the entity would have in the other entity if:

      (i) rights on winding-up were disregarded; and

      (ii) section 960-185 only applied to intermediate entities that are not corporate tax entities.

Company X holds an interest in Company Z via Trust A. It is Trust A which holds an interest in Company Z and according to the definition of 'corporate tax entity' in section 960-115 of the ITAA 1997, the Trust is not a corporate tax entity.

Consequently, as Company X holds its interest in Company Z via Trust A being the intermediate entity, Company X will only hold an indirect participation interest in Company Z pursuant to subsection 768-15(b) of the ITAA 1997.

Therefore, for Company X to satisfy the participation test in section 768-15 of the ITAA 1997 in relation to Company Z, Company X must have an indirect participation interest in Company Z of at least 10%.

Indirect participation interest

Subsection 960-185(1) of the ITAA 1997 sets out how to calculate the indirect participation interest that an entity (the 'holding entity') holds in another entity (the 'test entity') at a particular time and states that you must multiply:

   (a) the holding entity's direct participation interest (if any) in another entity (the intermediate entity) at that time;

by:

   (b) the sum of:

      (i) the intermediate entity's direct participation interest (if any) in the test entity at that time; and

      (ii) the intermediate entity's indirect participation interest (if any) in the test entity at that time (as worked out under one or more other applications of this section).

Further, subsection 960-185(2) of ITAA 1997 provides that:

If there is more than one intermediate entity to which paragraph (1)(a) applies at that time, the holding entity's indirect participation interest is the sum of the percentages worked out under subsection (1) in relation to each of those intermediate entities.

According to paragraph 53 of Taxation Determination Income tax: where an Australian corporate tax entity is a beneficiary of a trust, can the trust 'hold' a direct control interest (within the meaning of section 350 of the Income Tax Assessment Act 1936) in a foreign company for the purpose of Subdivision 768-A of the Income Tax Assessment Act 1997? (TD 2017/22), where an Australian corporate tax entity holds its interest in a foreign company indirectly, section 960-185 of the ITAA 1997 states that the Australian corporate tax entity's indirect participation interest is worked out by multiplying the Australian corporate tax entity's direct participation interest in the intermediate entity by the intermediate entity's direct participation interest in the foreign company.

According to paragraph 54 of TD 2017/22, where an Australian corporate tax entity holds its interest in a foreign company indirectly through a trust, the 'intermediate entity' for the purposes of section 960-185 of the ITAA 1997 will be the 'trust'. This is because a trust is recognised as an 'entity', pursuant to section 960-100 of the ITAA 1997.

As Company X holds its interest in Company Z indirectly via an interposed entity, Trust A will be the only 'intermediate entity' for the purposes of calculating the 'indirect participation interest'.

Therefore, Company X's indirect participation interest in Company Z is worked out by multiplying Company X's direct participation interest in Trust A (as per subparagraph 960-185(1)(b)(i) of the ITAA 1997) by Trust A's direct participation interest in Company Z (as per paragraph 960-185(1)(a) of the ITAA 1997).

Direct participation interest

Section 960-190 of the ITAA 1997 sets out the method for calculating the direct participation interest that one entity holds in another entity.

Pursuant to subsection 960-190(1) of the ITAA 1997:

1. Use the following table to work out the direct participation interest that one entity holds in another entity.

Table 2: Direct participation interest

Further, subsection 960-190(2) of the ITAA 1997 provides that:

For the purposes of subsection (1):

   (a) Apply sections 350 and 351 of the Income Tax Assessment Act 1936 as if those sections apply for the purposes of this Division rather than only for the purposes of Part X of that Act; and

   (b) Do not apply subsection 350(6) and (7) and 351(3) and (4) of that Act.

Trust's direct participation in a foreign company

According to paragraph 55 of TD 2017/22, a trust's direct participation interest in a foreign company is worked out by reference to the trustee's 'direct control interest' in the foreign company under section 350 of the ITAA 1936 (as per item 1 in subsection 960-190(1) of the ITAA 1997).

Section 350 of ITAA 1936 relevantly states the following in relation to the 'direct control interest' that an entity holds in relation to a company:

350(1) [Interests held by entity]

Subject to subsection (7), an entity holds a direct control interest in a company at a particular time equal to the percentage that the entity holds, or is entitled to acquire, at that time of:

   (a) the total paid-up share capital of the company; or

   (b) the total rights of shareholders to vote, or participate in any decision-making, concerning any of the following:

      (i) the making of distributions of capital or profits of the company to its shareholders;

      (ii) the constituent document of the company;

      (iii) any variation of the share capital of the company; or

   (c) the total rights to distributions of capital or profits of the company to its shareholders on winding-up; or

   (d) the total rights to distributions of capital or profits of the company to its shareholders, otherwise than on winding-up;

or, if different percentages are applicable under the preceding paragraphs, the greater or greatest of those percentages.

350(2) [Highest percentage to be applicable]

If the percentage of total rights to vote or participate in decision-making differs as between differing types of decision-making, the highest of those percentages applies for the purposes of paragraph (1)(b).

...

350(4) [Rights to distribution otherwise than on winding-up]

For the purposes of the application of subsection (1) to a company, the percentage that an entity holds, or is entitled to acquire, at a particular time (in this subsection called the test time) in a statutory accounting period of the company, of the total rights to distributions of capital or profits of the company to its shareholders, otherwise than on winding-up, is to be worked out by:

   (a) ascertaining whichever of the following is applicable:

      (i) the capital of the company as at the end of the statutory accounting period;

      (ii) the profits of the company for the statutory accounting period; and

   (b) assuming that the rights to such distributions that the entity holds, or is entitled to acquire, at the test time were the same at all other times during the statutory accounting period; and

   (c) ascertaining the percentage concerned:

      (i) at the end of the statutory accounting period instead of at the test time; and

      (ii) on that assumption.

Paragraph 56 of TD 2017/22 states that the direct control interest the trustee holds in the foreign company 'at a particular time' is equal to the percentage of share capital, rights to distributions or rights to vote that the trustee holds in the foreign company at that time.

Subsection 350(4) of the ITAA 1936 provides that, in calculating the percentage of rights to distributions, the percentage needs to be calculated at the end of the statutory accounting period.

Paragraph 57 of TD 2017/22 states that the 'particular time' when applying section 350 of the ITAA 1936 (for the purpose of paragraph 768-5(2)(d) of the ITAA 1997) will be the time the foreign equity distribution is made (the 'test time').

Applying the law to your circumstances

To calculate Trust A's direct participation interest in Company Z, you need to determine the Trustee's direct control interest in Company Z. This is equal to the percentage of share capital that the Trustee holds in Company Z at a particular time, whereby this percentage needs to be calculated at the end of Company Z's statutory accounting period.

Company Y as the Trustee held XXX ordinary shares in Company Z at the end of FY XX. There were XXX Company Z ordinary shares issued at the end of FY XX.

The 'particular time' (that is, the test time) that the Company Z dividend distribution was made to the Trustee was on DD MM YYYY.

On the date the Company Z dividends were declared, the Trustee held XXX ordinary shares of COMPANY Z.

The percentage of share capital that Company Y as the Trustee of Trust A held in Company Z at the test time was Y%.

Therefore, Trust A's direct participation interest in Company Z at the test time is equal to the Trustee's direct control interest in Company Z, which is Y%.

Beneficiary's direct participation interest in a Trust

Paragraph 58 of TD 2017/22 states that to work out the direct participation interest that an Australian corporate tax entity (beneficiary) holds in a trust, you need to determine its 'direct control interest' in the trust under section 351 of the ITAA 1936 (as per item 2 of subsection 960-190(1) of the ITAA 1997).

Section 351 of the ITAA 1936 relevantly states, in relation to the 'direct control interest' that a beneficiary of a trust holds in that trust, that:

351(1) [Interests held by entity]

An entity that is a beneficiary in a trust holds a direct control interest in the trust at a particular time equal to:

   (a) the percentage of the income of the trust represented by the share of the income to which the beneficiary is entitled, or that the beneficiary is entitled to acquire; or

   (b) the percentage of the corpus of the trust represented by the share of the corpus to which the beneficiary is entitled, or that the beneficiary is entitled to acquire;

or, if those percentages differ, the greater of those percentages.

351(2) [Entitlement to income or corpus of trust]

For the purposes of the application of subsection (1) to a trust:

   (a) the percentage of the income of the trust represented by the share of the income to which the beneficiary is entitled, or that the beneficiary is entitled to acquire; or

   (b) the percentage of the corpus of the trust represented by the share of the corpus to which the beneficiary is entitled, or that the beneficiary is entitled to acquire;

at a particular time (in this subsection called the "test time'") in a year of income of the trust, is to be worked out by:

   (c) ascertaining whichever of the following is applicable:

      (i) the income of the trust for the year of income;

      (ii) the corpus of the trust as at the end of the year of income; and

   (d) assuming that the share to which the entity is entitled, or that the entity is entitled to acquire, at the test time was the same at all other times during the year of income; and

   (e) ascertaining the percentage concerned:

      (i) at the end of the year of income instead of at the test time; and

      (ii) on that assumption.

Paragraph 59 of TD 2017/22 states that the direct control interest the beneficiary holds in the trust 'at a particular time' is equal to the percentage share of income or corpus to which the beneficiary is entitled (or entitled to acquire) at that time. The 'particular time' (for the purpose of paragraph 768-5(2)(d) of the ITAA 1997) will be the time when the foreign equity distribution is made (the 'test time').

Paragraph 60 of TD 2017/22 states that although subsection 351(1) of the ITAA 1936 requires the beneficiary's interest at the test time to be measured as a percentage of total income or corpus entitlements, it may be that the beneficiary's entitlement cannot be expressed as a percentage until the end of the year when the accounts of the trust are taken and the total trust income for the year is known. In such cases, subsection 351(2) of the ITAA 1936 enables the beneficiary's interest to be expressed as a percentage at the end of the income year instead of the test time, on the assumption however, that the relevant share to which the beneficiary is entitled (or entitled to acquire) at the test time was the same at all other times during the year of income.

Paragraph 62 of TD 2017/22 provides that a beneficiary's direct control interest in a discretionary trust is similarly equal to the percentage share of the income or corpus to which it is entitled (or entitled to acquire) at the test time.

Applying the law to your circumstances

To calculate Company X's direct participation interest in Trust A, the percentage share of income or corpus to which Company X is entitled (or entitled to acquire) at the 'particular time' that the foreign equity distribution is made by Company Z needs to be determined.

Usually, this percentage of total Trust income that Company X is entitled to cannot be known until the end of an income year, when the Trust income for that year is calculated.

By Resolution of Sole Director, Individual A as sole director of the Trustee company determined that the income of Trust A for FY XX would be calculated as taxable income of Trust A excluding notional amounts such as franking credit gross ups.

Individual A also determined that the income of Trust A for FY XX would be separated into three categories being Category A, Category B and Other Income.

Company X was made entitled to 100% of the Other Income for FY XX.

On a date after the Resolution of Sole Director was executed, Trust A received a dividend of $amount from Company Z. The percentage interest in the total income of the trust could not be expressed as a percentage at the time Trust A received the dividend amount from Company Z.

Trust A's income categories were determined on DD MM XXXX to be Category A, Category B and Other Income. It was already known on the day when Company Z dividends were declared that Company Z dividends would be included in Trust A's Other Income category. At the test time when Company Z dividends were received by Trust A, Company X was made entitled to 100% of Trust A's Other Income, and Company X's Trust income entitlement for FY XX was already known.

The total Trust income of Trust A for FY XX is $amount.

The Other Income of Trust A for FY XX is $amount.

Therefore, the percentage of total Trust income (in Australian Dollars) that Company X was entitled to at test time was X%

Therefore, Company X's direct participation interest in Trust A at the test time was X%.

Company X's indirect participation interest in Company Z

Company X's indirect participation interest in Company Z is worked out by multiplying Company X's direct participation interest in Trust A by Trust A's direct participation interest in Company Z.

At the test time, Company X's indirect participation interest in Company Z equals:

X% x Y% = Z%

For Company X to satisfy the participation test in section 768-15 of the ITAA 1997 in relation to Company Z, Company X must have an indirect participation interest in Company Z of at least W%. As Company X's indirect participation interest in Company Z at the test time was Z%, Company X satisfies the participation test in section 768-15 of the ITAA 1997.

(e) Receipt of foreign equity distribution in the capacity of trustee

Paragraph 768-5(2)(e) of the ITAA 1997 requires that the entity receiving the foreign equity distribution:

   (i) does not receive the distribution in the capacity of a trustee; or

   (ii) receives the distribution in the capacity of a trustee of a public trading trust...

Company X received the Company Z dividend distributions in its capacity as a beneficiary of Trust A. Therefore, Company X did not receive the Company Z dividend distribution in the capacity of a trustee or in the capacity of a public trading trust and satisfies paragraph 768-5(2)(e) of the ITAA 1997.

(f) Applicability of foreign income tax deductions

Paragraph 768-5(2)(f) of the ITAA 1997 states in relation to the foreign equity distribution received by Company X that:

The distribution is not one to which section 768-7 (which is about foreign income tax deductions) applies.

Company Z is not entitled to deduct any part of the dividend in working out its taxable income for the foreign income tax purposes.

Therefore, paragraph 768-5(2)(f) of the ITAA 1997 is satisfied.

Conclusion

As all the criteria in subsection 768-5(2) of the ITAA 1997 are satisfied, the amount of the net income of Trust A that would otherwise be included in the assessable income of Company X because of Division 6 of Part III of the ITAA 1936 is NANE of Company X.

Question 2

Summary

The amount of $amount is not the portion of the net income of Trust A that is NANE of Company X pursuant to subsection 768-5(2) of the ITAA 1997 for FY XX.

Detailed reasoning

Franked distribution

Division 207 of the ITAA 1997 deals with the effect of receiving franked distributions. Subdivision 207-B specifically deals with franked distributions received through certain partnerships and trustees.

Subsection 207-35(4) of the ITAA 1997 provides:

Despite any provisions in Divisions 5 and 6 of Part III of the Income Tax Assessment Act 1936, the entity's assessable income for that year also includes:

   (a)  in the case of an entity that is a partner in a partnership-so much of the franking credit amount as is equal to the entity's share of the franking credit on the distribution; and

   (b) in the case of an entity that is a beneficiary of a trust:

      (i) so much of the franking credit amount as is equal to the entity's share of the franking credit on the distribution; and

      (ii) the amount mentioned in section 207-37

Section 207-37 deals with attributable franked distributions from trusts. Subsection 207-37(1) provides that the amount is the product of:

   (a) the amount of the franked distribution (to the extent that an amount of the franked distribution remained after reducing it by deductions that were directly relevant to it), and

   (b) the beneficiary's or the trustee's (as the case requires) share of the franked distribution (see section 207-55), divided by the amount of the franked distribution.

Therefore, part of the other income of Trust A (i.e. the franked dividend component) that Company X was made entitled to in FY XX is assessable under subsection 207-35(4) of the ITAA 1997. The amounts assessed under subsection 207-35(4) can only be reduced by deductions that were directly relevant to those franked distributions.

Any other expenses of Trust A, not directly relevant to getting these franked distributions, must be apportioned against other sources of trust income. This apportionment reduces the amount of the Company Z dividends assessed under Division 6 of Part III of the ITAA 1936. Excluding the franked distributions, Trust A only had Company Z dividends and a distribution from a family trust (Trust B). The general expenses of the Trust A must be apportioned across these two sources of trust income to determine how much of each is included in assessable income underDivision 6 of Part III of the ITAA 1936.

Based on the information provided, the amount of $amount can only be calculated if the general expenses of Trust A are applied wholly first against the distribution from Trust B before the Company Z dividend amount assessed under Division 6 is reduced. As the general expenses of Trust A cannot be attributed specifically against one type of income, it would be wrong to take this ordered approach.

Conclusion

The NANE income amount of Company X only includes the amount that apart from subsection 768-5(2) of the ITAA 1997 would otherwise be included in the assessable income of Company X because of Division 6 of Part III of the ITAA 1936.

The amount of $amount is not the correct NANE amount of Company X as the general expenses of Trust A must be apportioned across both the Company Z distribution and the distribution from Trust B, meaning less than $amount of the Company Z dividends was included in the assessable income of Company X because of Division 6 of Part III of the ITAA 1936.