ATO ID 2002/122: Beneficiary's (life tenant's) entitlement to franking credits
Date of decision: 14 December 2001
Year of income: Year ended 30 June 1998 Year ended 30 June 1999 Year ended 30 June 2000
Business line: Private Groups and High Wealth Individuals

Issue
Is the taxpayer, who is a life tenant of a testamentary trust, entitled to the benefit of franking credits, under section 207-45 of the Income Tax Assessment Act 1997 (ITAA 1997), which are attributable to shares acquired by the trust post 31 December 1997 and distributed from that trust?

Decision
No. The taxpayer, a life tenant of a testamentary trust created under a last will and testament is not entitled to the benefit of franking credits, under section 207-45 of the ITAA 1997, which are attributable to shares acquired by the trust post 31 December 1997 and distributed from that trust.

Facts
The taxpayer is a life tenant of a testamentary trust created, as a result of a last will and testament. The trust holds as investments, shares in various companies from which franked dividends are received. The taxpayer, as a beneficiary, is entitled to a share of the income of the trust. The taxpayer has no entitlement to the corpus of the trust. The taxpayer has received dividends during the year of income from a number of sources. The franking credits attached to these dividends exceed $5,000.

Reasons for decision
Summary: Under former subsection 160APHL(10) of the ITAA 1936, and more particularly paragraph (b) the testamentary trust is not a trust merely because of a reference to executors and administrators as contained in paragraph (a) of the definition of a trustee in subsection 6(1) of the ITAA 1936. Thus, former subsection 160APHL(10) of the ITAA 1936 will give rise to a short position equal to the long position that arose under former subsection 160APHL(7) of the ITAA 1936, which will in effect cancel the long position arising under former subsection 160APHL(7) of the ITAA 1936. Furthermore, where the taxpayer's interest in the trust holding is a fixed interest, it would also give rise to a corresponding long position. However, this will not occur in the present situation, as under former subsection 160APHL(11) of the ITAA 1936, a fixed interest will only arise where there is a vested and indefeasible interest in the corpus of the trust, which the taxpayer does not have. Therefore, the taxpayer is left with a nil net position. This will, under former subsection 160APHM(2) of the ITAA 1936, constitute a material diminution in the taxpayer's risk of loss or opportunity for gain. Consequently, on this basis, the taxpayer will be denied entitlement to the benefit of franking credits. As the taxpayer's income included dividends with franking credits attached, in excess of $5,000 the small shareholder exemption available under former section 160APHT of the ITAA 1936 does not apply.

Legislative references: Income Tax Assessment Act 1936 subsection 6(1) section 160APHL subsection 160APHM(2) section 160APHT
Subject references: Imputation system Imputation credits Testamentary trusts