ATO ID 2004/859: Family Trust Distribution Tax: franking credits
Date of decision: 25 October 2004
Year of income: Year ended 30 June 2003
Business line: Private Groups and High Wealth Individuals

Issue
Is the trustee of a family trust, which is liable for Family Trust Distribution Tax (FTDT) pursuant to Division 271 of Schedule 2F to the Income Tax Assessment Act 1936 (ITAA 1936) on a distribution to a beneficiary, able to use franking credits associated with that distribution to offset the FTDT?

Decision
No. The trustee of a family trust cannot use franking credits associated with a distribution which is subject to FTDT.

Facts
The trustee of a family discretionary trust elected to be a family trust in its tax return for the year ended 30 June 2000 to ensure the beneficiaries would be qualified persons in respect of Division 1A of Part IIIAA of the ITAA 1936. During the year ended 30 June 2003, the trustee resolved to distribute $1,000 of its income to a distant relative who is not part of the family as defined in section 272-95 of Schedule 2F to the ITAA 1936. Franking credits of $60 were attached to the distribution. This represented the relative's proportionate share of the total franking credits included in the assessable income of the trust for the year ended 30 June 2003. Because the distribution was made to a beneficiary outside the family, the trustee is liable to FTDT pursuant to section 271-15 of Schedule 2F to the ITAA 1936. The FTDT was paid by the trustee.

Reasons for decision
Summary: Subsection 207-35(4) of the Income Tax Assessment Act 1997 (ITAA 1997) ensures that a beneficiary of a trust, the trustee of which is neither a corporate tax entity nor a trustee of a complying superannuation entity, is assessed on any franking credits that are associated with a franked distribution that flows indirectly to the beneficiary as defined in subsection 207-50(3) of the ITAA 1997. A beneficiary is then entitled to a tax offset equal to the amount of the franking credits, through the operation of section 207-45 of ITAA 1997. Where a trustee is liable for FTDT, section 271-105 of Schedule 2F to the ITAA 1936 will reduce the amount to be included in the assessable income of a beneficiary of the trust in accordance with the formula prescribed in subsection 271-105(2). Once the FTDT is fully paid, the whole amount is excluded from the assessable income of the beneficiary. Subsection 207-50(3) of the ITAA 1997 ensures that, once the liability to the FTDT has been paid, a franked distribution does not flow indirectly to the beneficiary. This means that subsection 207-35(4) of the ITAA 1997 does not include the associated franking credits in assessable income and any entitlement the beneficiary may have otherwise had to those credits under section 207-45 of the ITAA 1997, is not available. As with the beneficiary, the trustee is not assessable on the franking credits and is not entitled to a tax offset associated with those franking credits once the liability to the FTDT has been paid. This is because a franked distribution does not flow indirectly to the trustee as defined in subsection 207-50(4) of the ITAA 1997.

Legislative references: Income Tax Assessment Act 1936 Division 1A of Part IIIAA section 271-15, Schedule 2F section 272-95, Schedule 2F section 271-105, Schedule 2F subsection 271-105(2), Schedule 2F
Subject references: Family trust distribution tax Family trusts Franking credits Trust distributions Trustees