ATO ID 2003/1105: Franking of dividends: holding period and related payments - qualified person - no family trust election
Date of decision: 27 November 2003
Year of income: Year ended 30 June 2004
Business line: Private Groups and High Wealth Individuals

Issue
Is a beneficiary of a non-fixed trust a qualified person under section 160APHO of the Income Tax Assessment Act 1936 (ITAA 1936) in relation to a dividend paid on ordinary shares acquired by the trustee post 31 December 1997 and held at risk for 45 days where the trustee has not made a family trust election?

Decision
No. The beneficiary will not be a qualified person under section 160APHO of the ITAA 1936 in relation to the dividend as the failure by the trustee to make a family trust election would result in the beneficiary's risk of loss or opportunity for gain being materially diminished.

Facts
An individual beneficiary claimed $6,200 in franking credits on a distribution of franked dividends on ordinary shares acquired by the trustee of a non-fixed trust on 16 January 2002. The trustee held the shares at risk from the date of purchase to the end of April 2002. The trustee has not made a family trust election. Neither the trustee nor any associate of the trustee has made, is under an obligation to make, or is likely to make, a related payment in respect of the dividend. The beneficiary did not acquire any independent positions in relation to the shares.

Reasons for decision
Summary: As a non-fixed trust, the trust would constitute a non-widely held trust. A beneficiary of a non-widely held trust is taken to acquire, hold and dispose of an interest in shares held by the trust when the trustee acquires, holds and disposes of shares or an interest in shares (sub-section 160APHG(3) of the ITAA 1936). If a beneficiary of a non-widely held trust is to be a qualified person under section 160APHO of the ITAA 1936, they must hold their interest at risk for not less than 45 days during the primary qualification period where no related payments have been made. A beneficiary's interest in the trust holding is determined under section 160APHL of the ITAA 1936. Under sub-section 160APHL(5), the beneficiary of a trust is taken to have an interest in the trust holding that is determined in proportion to their entitlement to the relevant dividend income. Sub-section 160APHL(7) attributes a long position with a delta of +1 in respect of that interest. However, where the trustee has not made a family trust election, this long position will be negated and a further long position created to reflect any fixed interest the beneficiary may hold in the trust holding. (paragraph 160APHL(10)(a)). The beneficiary will be taken to have a fixed interest where they have an indefeasible vested interest in the corpus of the trust. Consequently, in the absence of a family trust election as well as a vested and indefeasible interest in the corpus of the trust, a beneficiary would experience a material diminution in the risk of loss or opportunity for gain in respect of their interest in the trust holding and will not be taken to have held their interest at risk for the requisite period. Therefore, the beneficiary of a non-fixed trust will not be a qualified person under section 160APHO of the ITAA 1936 in relation to the dividend paid where the trustee has not made a family trust election.

Legislative references: Income Tax Assessment Act 1936 section 160APHL section 160APHO subsection 160APHG(3)