ATO ID 2003/1106: Franking of dividends: holding period rule and related payments rule - trustee of a trust - interest in corpus
Date of decision: 27 November 2003
Year of income: Year ended 30 June 2004
Business line: Private Groups and High Wealth Individuals

Issue
Will a beneficiary that holds an interest in the corpus of a trust, that is in receipt of franked distributions, be entitled to tax offsets under Division 207 of the Income Tax Assessment Act 1997 (ITAA 1997) on distributions flowing through to the beneficiary, if the trustee has not made a family trust election?

Decision
No. The beneficiary will not be entitled to the benefit of tax offsets under Division 207 of the ITAA 1997, if they do not hold an indefeasible vested interest in the corpus of the trust.

Facts
The trustee of a non-widely held discretionary trust holds an extensive portfolio of shares. The income of the trust consists primarily of dividends from these shares. Having held the shares at risk for a period of at least 90 days, the trustee is a qualified person. The terms of the trust deed permits the creation of other interests under the trust. The trustee has not made a family trust election.

Reasons for decision
Summary: Under subsection 160APHG(3) of the Income Tax Assessment Act 1936 (ITAA 1936), a beneficiary of a non-widely held trust is taken to acquire, hold and dispose of an interest in shares held by a trust when the trustee acquires, holds or disposes of shares or an interest in shares. Consequently, a beneficiary of a discretionary trust will be taken to hold an interest in the shares while the trustee holds the shares. Pursuant to subsection 160APHL(5) of the ITAA 1936, a beneficiary's interest in shares held by the trustee of a non widely held trust will be determined in proportion to the beneficiary's share of the dividend income derived by the trust. According to subsection 160APHL(7), that beneficiary's interest is a long position with a delta of +1 in relation to itself. However, pursuant to subsection 160APHL(10) of the ITAA 1936, where the trust is not: the beneficiary has a short position equal to the long position under subsection 160APHL(7) and a long position equal to so much of the beneficiary's interest in the trust holding as is a fixed interest. Subsection 160APHL(11) defines a fixed interest as a vested and indefeasible interest. As the trustee of the discretionary trust has not made, nor intends to make, a family trust election under Subdivision 272-D of Schedule 2F to the ITAA 1936, subsection 160APHL(10) of the ITAA 1936 will give rise to a short position equal to the long position that arose under subsection 160APHL(7) of the ITAA 1936. However, as the beneficiary's interest in the corpus will not be taken to be indefeasible on account of the fact that the trust deed permits the creation of other interests which may defease the beneficiary's interest in the corpus of the trust, no further long position will arise. Consequently, the beneficiary cannot be said to enjoy a fixed interest in the corpus of the trust, and a material diminution in the beneficiary's risk of loss or opportunity for gain would arise.

Legislative references: Income Tax Assessment Act 1936 section 160APHG section 160APHL section 160APH0 Schedule 2F
Subject references: Imputation credits