Private ruling: Franked distributions
Date of advice: 3 February 2023
Published: 20 March 2023
Ruling period: Year ended 30 June 20XX | Year ended 30 June 20XX | Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Is the trustee of Testamentary Trust A (hereafter referred to as 'the Trustee') liable to be assessed and pay tax under section 99 or 99A of the Income Tax Assessment Act 1936 (ITAA 1936) on the share of franked dividend income they received from the trustee of a deceased estate, (hereafter referred to as 'the Executors' and 'the Estate')? | A1: No. | Q2: Will section 207-35 of the Income Tax Assessment 1997 (ITAA 1997) apply to include as assessable income of the Trustee, the Trustee's share of the franking credits on the franked dividend income distributed to them by the Estate? | A2: No. | Q3: Will the Trustee be entitled under section 207-45 of the ITAA 1997 to a tax offset equal to their share of the franking credits on the franked dividend income distributed to them by the Estate? | A3: No.

Relevant facts and circumstances: 1. The will of a deceased person included the establishment of Testamentary Trust A to receive income from assets held by the deceased at the time of their death. 2. The assets included share in companies that paid franked distributions to their shareholders in the years ended 30 June 20XX, 20XX, and 20XX. 3. The Executor of the Estate allocated and paid a share of these franked distributions to Testamentary Trust A. 4. For the years ended 30 June 20XX, 30 June 20XX, and 30 June 20XX the share of the franked distributions was greater than the share of the franking credits 5. The trustee of Testamentary Trust A was a non-resident, as defined in subsection 6(1) of the ITAA 1936, during and at the end of the years ended 30 June 20XX, 30 June 20XX, and 30 June 20XX. 6. For the years ended 30 June 20XX, 30 June 20XX, and 30 June 20XX the share of the franked distributions received by Testamentary Trust A was greater than the share of the franking credits it received in respect of its share of the franked distributions. 7. The Trustee resolved to accumulate all income of Testamentary Trust A for the years ended 30 June 20XX, 30 June 20XX, and 30 June 20XX.

Relevant legislative provisions: Income Tax Assessment Act 1936 Division 11A | Income Tax Assessment Act 1936 section 95 | Income Tax Assessment Act 1936 paragraph 97(3)(c) | Income Tax Assessment Act 1936 section 98 | Income Tax Assessment Act 1936 subsection 98(4) | Income Tax Assessment Act 1936 section 99 | Income Tax Assessment Act 1936 section 99A | Income Tax Assessment Act 1997 Division 207 | Income Tax Assessment Act 1997 Subdivision 207B | Income Tax Assessment Act 1997 subsection 207-20(1) | Income Tax Assessment Act 1997 subsection 207-20(2) | Income Tax Assessment Act 1997 section 207-35 | Income Tax Assessment Act 1997 subsection 207-35(1) | Income Tax Assessment Act 1997 subsection 207-35(2) | Income Tax Assessment Act 1997 subsection 207-35(3) | Income Tax Assessment Act 1997 paragraph 207-35(3)(a) | Income Tax Assessment Act 1997 subsection 207-35(4) | Income Tax Assessment Act 1997 subsection 207-35(5) | Income Tax Assessment Act 1997 paragraph 207-35(5)(a) | Income Tax Assessment Act 1997 subsection 207-35(6) | Income Tax Assessment Act 1997 section 207-45 | Income Tax Assessment Act 1997 subsection 207-50(4) | Income Tax Assessment Act 1997 paragraph 207-50(4)(a) | Income Tax Assessment Act 1997 paragraph 207-50(4)(b) | Income Tax Assessment Act 1997 subparagraph 207-50(4)(b)(i) | Income Tax Assessment Act 1997 paragraph 207-50(4)(c) | Income Tax Assessment Act 1997 section 207-55 | Income Tax Assessment Act 1997 subsection 207-55(1) | Income Tax Assessment Act 1997 subsection 207-55(2) | Income Tax Assessment Act 1997 subsection 207-55(3) | Income Tax Assessment Act 1997 subsection 207-55(4) | Income Tax Assessment Act 1997 subparagraph 207-55(4)(a)(ii)

Reasons for decision: Detailed Reasoning - Question 1: Is the Trustee liable to be assessed and pay tax under section 99 or 99A of the ITAA 1936 on the share of franked dividend income they received from the Executor? | Summary: Even though the franked distribution was received by the Estate, subsection 207-50(4) applies to deem Testamentary Trust A's share of the franked distribution as having flowed indirectly to the Executor because the Executor would have been assessable on each distribution under section 98 of the ITAA 1936 if you disregarded provisions outside of section 98. In following the note to subsection 207-50(4), as the share of the franked distribution is deemed to have flowed to the Executor, that share cannot then flow through to another entity, including Testamentary Trust A or a beneficiary of Testamentary Trust A. As the distributions do not flow through to Testamentary Trust A, it does not have a share amount in respect of the franked distributions the Executors received. Therefore, there is no amount under Subdivision 207-B that could form part of Testamentary Trust A's assessable income under section 99 or 99A of the ITAA 1936. | Detailed Reasoning - Detailed reasoning: Subdivision 207-B franked distributions 1. Franked distributions of a trust are allocated to beneficiaries and the trustee in accordance with the rules in Subdivision 207-B. 2. Subsections 207-55(1) and (2) state: 207-55(1) The object of this section is to ensure that: (a) the amount of a *franked distribution made to a partnership or the trustee of a trust is allocated notionally amongst entities who *derive benefits from that distribution; and (b) that allocation corresponds with the way in which those benefits were derived. Note: An entity can derive a benefit from the distribution (and therefore has a share of the distribution) without actually receiving any of the distribution: see subsection (2) of this section and the example at the end of section 207-50. 207-55(2) An entity's share of a *franked distribution is an amount notionally allocated to the entity as its share of the distribution, whether or not the entity actually receives any of that distribution. 3. That is, section 207-55 can apply to an entity regardless of whether that entity received any of the franked distribution. [1] The definition of entity in subsection 960-100(1) includes a trust. 4. The amount that is to be allocated to an entity is determined under subsection 207-55(3) as follows: That amount is equal to the entity's share of the distribution as the focal entity in column 3 of an item of the table. 5. In respect of a trust that received the franked distribution, the relevant item in the table in subsection 207-55(3) is item 3: | Detailed Reasoning - The focal entity's share of the franked distribution is:: 3 the trustee of a trust is the intermediary entity and the trustee or a beneficiary of the trust is the focal entity if: (a) a *franked distribution is made to the trustee; and (b) the trustee or beneficiary has, in respect of the trust, a share amount mentioned in subsection 207-50(3) or (4) a) if the trust has a positive amount of *net income for that year - the amount of the franked distribution; or (b) otherwise - nil the amount mentioned in subsection (4) 6. Subsection 207-50(4) is the applicable subsection in respect of a trustee of a trust: A *franked distribution flows indirectly to the trustee of a trust in an income year if, and only if: (a) during that income year, the distribution is made to the trustee, or *flows indirectly to the trustee as a partner or beneficiary because of a previous application of subsection (2) or (3); and (b) the trustee is liable or, but for another provision in this Act, would be liable, to be assessed in respect of an amount (the share amount) that is: (i) a share of the trust's *net income for that income year under section 98 of the Income Tax Assessment Act 1936; or (ii) all or a part of the trust's net income for that income year under section 99 or 99A of that Act; (whether or not the share amount becomes assessable income in the hands of the trustee); and (c) the trustee's *share of the distribution under section 207-55 is a positive amount (whether or not the trustee actually receives any of that share). Note: A trustee to whom a franked distribution flows indirectly under this subsection is entitled to a tax offset under section 207-45 and the distribution does not flow indirectly through the trustee to another entity. 7. The Explanatory Memorandum (EM) to the Tax Laws Amendment (2004 Measures No. 2) Bill 2004 explains how section 207-50 is to be applied: 10.15 The definition of 'flow indirectly' in section 207-35 will be replaced so that a franked distribution can flow indirectly to an entity where the distribution, or part of the distribution, is exempt income or non-assessable non-exempt income in the hands of the recipient. Under the new definition, a franked distribution will be taken to flow indirectly to a partner in a partnership or to a beneficiary or the trustee of a trust if: • the distribution is made to a partnership or trustee of a trust or flows indirectly to the partnership or to the trustee or beneficiary of the trust as a partner or beneficiary [Schedule 10, item 7, paragraphs 207-50(2)(a), (3)(a) and (4)(a)] ; and • one of the following is satisfied: - the partner has an individual interest in the partnership's net income or is allowed a deduction for a partnership loss under subsections 92(1) and (2) of the ITAA 1936 [Schedule 10, item 7, paragraph 207-50(2)(b)] ; or - the beneficiary has a share of the trust's net income under paragraph 97(1)(a) of the ITAA 1936 or an individual interest in the trust's net income under paragraph 98A(1)(a) or (b) or 100(1)(a) or (b) of the ITAA 1936 [Schedule 10, item 7, paragraph 207-50(3)(b)] ; or - the trustee is liable to be assessed on a share of the trust's net income in respect of a beneficiary under section 98 of the ITAA 1936 or assessed on all or part of the trust's net income for that year under section 99 or 99A of the ITAA 1936 [Schedule 10, item 7, paragraph 207-50(4)(b)] ; and • the entity's share of the franked distribution as calculated in new section 207-55 is a positive amount. That is, the entity must have an entitlement to part or all of the franked distribution [Schedule 10, item 7, paragraphs 207-50(2)(c), (3)(c) and (4)(c)]. 8. The Commissioner's view as to how a franked distribution is allocated under Subdivision 207-B is outlined in paragraphs 66 to 68 and 74 to 76 of TD 2012/22 as follows: 66. For the 2010-11 and later income years, capital gains and franked distributions included in the net income of a trust are brought to tax in accordance with Subdivisions 115-C and 207-B of the ITAA 1997 respectively. 67. As a result of modifications under Division 6E of Part III of the ITAA 1936 (Division 6E), the balance of the net income (that is the net income excluding amounts attributable to capital gains and franked distributions) of the trust is still assessed under Division 6 effectively in the manner described in paragraphs 57 to 59. 68. Division 6E adjusts the rules in Division 6 to ensure that capital gains and franked distributions are not taxed twice (that is, once as a result of the operation of Subdivisions 115-C or 207-B of the ITAA 1997 and again by reason of Division 6). In broad terms the effect of Division 6E is to carve out net capital gains and franked distributions from the operation of Division 6 by excluding net capital gains and franked distributions from the trust's net income, and any amount relating to these things is excluded from the income of the trust estate. Example 11 illustrates. | Detailed Reasoning - Subdivision 207-B of the ITAA 1997: 74. Franked distributions of a trust are allocated to beneficiaries and the trustee in accordance with the rules in Subdivision 207-B of the ITAA 1997. These rules differentiate between entities with a specific entitlement to all or part of a franked distribution and other entities. Trustees cannot be specifically entitled to a franked distribution. 75. If there is some part of a franked distribution to which no beneficiary is specifically entitled, a beneficiary or the trustee will be taken to have a share of the franked distribution equal to that franked distribution multiplied by their 'adjusted Division 6 percentage' of the income of the trust estate in the relevant income year. 76. Similarly to capital gains, this means that where no entity is specifically entitled to any capital gain or franked distribution of the trust, each beneficiary will generally be assessable on their proportionate share of the net franked distributions of the trust and attached franking credits, and the trustee will generally be similarly assessed where there is no income of the trust estate or income of the trust estate to which no beneficiary is presently entitled. 9. In respect of the Executor, as the distribution was made to the Estate, paragraph 207-50(4)(a) is satisfied. 10. Subparagraph 207-50(4)(b)(i) applies where a trustee is liable to be assessed under section 98 of the ITAA 1936. Subsection 98(4) of the ITAA 1936 applies: If: (a) a beneficiary of a trust estate (the first trust estate) who is presently entitled to a share of the income of the first trust estate: (i) is, in respect of that share of the income of the first trust estate, a beneficiary in the capacity of a trustee of another trust estate; and (ii) is not a beneficiary to whom subsection 97(3) applies; and (b) a trustee of the other trust estate is a non-resident at the end of the year of income; the trustee of the first trust estate is to be assessed and is liable to pay tax in respect of so much of that share of the net income of the first trust estate as is attributable to sources in Australia at the rate declared by the Parliament for the purposes of this subsection. Note: If the trust estate's net income includes a net capital gain, Subdivision 115-C of the Income Tax Assessment Act 1997 affects the assessment of the trustee. 11. This provision replaced a former subsection 98(4) of the ITAA 1936 via the Tax Laws Amendment (2007 Measures No. 3) Bill 2007 and paragraphs 10.15 to 10.18 of the EM to this Bill explains the intent of the rewrite of section 98 of the ITAA 1936 as follows: 10.15 Subsection 98(2A) will now set out the circumstances in which a trustee is taxed in relation to a non-resident company or individual beneficiary [Schedule 9, item 1, subsection 98(2A)]. Subsection 98(3) will now provide the rules for determining the rates of tax that a trustee pays in relation to the share of the net income of those beneficiaries [Schedule 9, item 1, subsection 98(3)]. 10.16 The rewritten provisions do not change the way a trustee is taxed in relation to non-resident company and individual non-trustee beneficiaries. The trustee is taxed on a non-resident beneficiary's share of the net income of the trust whether attributable to Australian or foreign sources for the period the beneficiary is a resident. The trustee is taxed only on net income of the trust attributable to Australian sources (excluding dividends, interest and royalties) for the period the beneficiary is a non-resident. [Schedule 9, item 1, subsections 98(2A) and (3)] | Detailed Reasoning - Extending the liability of trustees: 10.17 These amendments extend a trustee's liability to pay tax to include the case where a non-resident beneficiary is a trustee of another trust and is presently entitled to income of the first trust. The trustee of the first trust is assessed on net income of the trust attributable to Australian sources (other than dividends, interest and royalties) for an income year if a trustee of the other trust is a non-resident at the end of that income year. If the other trust has more than one trustee, the amendments will apply if at least one trustee is a non-resident at that time. [Schedule 9, item 1, subsection 98(4)] | Detailed Reasoning - Dividends, interest and royalties: 10.18 A beneficiary is liable, under the withholding tax rules in Division 11A of Part III, for tax on Australian dividends, interest and royalties to which they are presently entitled while a non-resident. The withholding tax is collected from the trustee under the pay as you go withholding rules in the Taxation Administration Act 1953 . Income taxed under the withholding tax rules or excluded from those rules is not treated as assessable income and is therefore not taxed again to the trustee or beneficiary under either the current or new rules. 12. As detailed in paragraph 10.17 of the EM, subsection 98(4) of the ITAA 1936 applies where a non-resident beneficiary is a trustee of another trust and is presently entitled to income of the first trust at the end of the income year. The subsection also applies where there is more than one beneficiary and one of the beneficiaries is a non-resident at the end of the income year. 13. Although paragraph 10.18 of the EM discusses Division 11A of the ITAA 1936, in respect of the amount assessed for the purposes of applying subsection 207-50(4), Division 11A is not considered. This is because under paragraph 207-50(4)(b) you determine if the trustee is liable or, but for another provision in this Act, would have been liable, to be assessed under section 98 of the ITAA 1936. 14. As the Trustee was a non-resident as the end of the years ended 30 June 20XX, 20XX and 20XX, was presently entitled to income of the Estate in their capacity as a trustee of Testamentary Trust A, and is not a type of beneficiary identified in paragraph 97(3)(c) [2] of the ITAA 1936, subsection 98(4) of the ITAA 1936 will apply to assess the Executor on Testamentary Trust A's share of the Estate's net income. 15. In respect of the Executor, as they are liable under subsection 98(4) of the ITAA 1936 for Testamentary Trust A's share amount, paragraph 207-50(4)(b) has been satisfied. 16. Paragraph 207-50(4)(c) requires that the trustee's share of the distribution under section 207-55 of the ITAA 1997 be a positive amount which, under column 2 in item 3 of subsection 207-55(4) where 'positive amount' is referenced, states 'the trust has a positive amount of *net income for that year'. 17. 'Net income' of a trust estate is defined in section 95: 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. 18. The Executor paid the share amount to Testamentary Trust A. The Executors could only have made the payment if there was a positive amount. 19. As paragraph 207-50(4)(c) and all the other paragraphs of subsection 207-50(4) have been satisfied, and the distribution was made to the Estate, then under column 1 in item 3 of the table in subsection 207-55(3), the Executor is the focal entity in respect of Testamentary Trust A's share of the franked distribution. 20. Column 3 of item 3 of subsection 207-55(3) thus provides that the Executor's 'share of the franked distribution' is the amount determined in accordance with subsection 207-55(4). 21. Subsection 207-55(4) states: For the purposes of column 3 of item 3 of the table in subsection (3), the amount is the sum of: (a) so much of the amount worked out under column 2 of item 3 of the table in subsection (3) to which: (i) unless subparagraph (ii) applies - the focal entity is *specifically entitled; or (ii) if the focal entity is the trustee and has the share amount because of the operation of section 98 of the Income Tax Assessment Act 1936 in respect of a beneficiary (see subparagraph 207-50(4)(b)(i)) - the beneficiary is specifically entitled; and (b) if there is an amount of the *franked distribution to which no beneficiary is specifically entitled - that amount multiplied by: (i) unless subparagraph (ii) applies - the focal entity's *adjusted Division 6 percentage of the income of the trust for the relevant income year; or (ii) if the focal entity is the trustee and has the share amount because of the operation of section 98 of the Income Tax Assessment Act 1936 in respect of a beneficiary (see subparagraph 207-50(4)(b)(i)) - the beneficiary's adjusted Division 6 percentage of the income of the trust for the relevant income year. 22. Guidance as to the interpretation of subsection 207-55(4) of the ITAA 1997 is included in paragraphs 2.125 to 2.127 of the EM to the Tax Laws Amendment (2011 Measure No. 5) Bill 2011 as follows: 2.125 Where a trust receives a franked distribution and the distribution flows through the trust to a beneficiary, the amendments to item 3 mean that the beneficiary's share of the franked distribution is now calculated under subsection 207-55(4) as the sum of: • the amount of the franked distribution to which the beneficiary is specifically entitled (see paragraph 2.133); and • the beneficiary's proportionate entitlement to any part of the franked distribution to which no beneficiary is specifically entitled. [Schedule 2, item 23, subsection 207-55(4)] 2.126 Where a trustee is liable to be assessed and pay tax in respect of a beneficiary under section 98 of the ITAA 1936 (or would be so liable but for another provision in the Act such as Division 6E), subparagraph 207-55(4)(a)(ii) operates to treat the trustee as being specifically entitled to the amount of the franked distribution to which the relevant beneficiary is specifically entitled. [Schedule 2, item 23, paragraph 207-55(4)(a)] 2.127 A beneficiary's proportionate share of that part of a franked distribution to which no beneficiary is specifically entitled, is calculated in accordance with paragraph 207-55(4)(b). This amount is the amount of the franked distribution multiplied by the beneficiary's adjusted Division 6 percentage. Again allowance is made for circumstances where a trustee is assessed in respect of a beneficiary under section 98 of the ITAA 1936. [Schedule 2, item 23, subparagraphs 207-55(4)(b)(i) and (ii)] 23. In applying subsection 207-55(4), the amount the Executor includes as their share amount is the amount the Trustee, as a beneficiary of Estate, were specifically entitled to under subparagraph 207-55(4)(a)(ii) in the years ended 30 June 20XX, 20XX, and 20XX. 24. The note to subsection 207-50(4) confirms that when the subsection applies to a trustee of a trust the distribution does not then flow through to another entity. That is, once the subsection applies to the Executor, the distribution cannot then flow through to the Trustee or to a beneficiary of Testamentary Trust A. 25. As the Trustee cannot have a share amount under item 3 of the table in subsection 207-55(3) in respect of the distribution deemed to have flowed to the Executor there is no need to examine item 4 of the table in subsection 207-55(3), [3] to determine if the Trustee or Testamentary Trust A's beneficiaries are liable to pay tax under item 4. 26. As there is no share amount under Subdivision 207-B, in respect of the Trustee's share of the franked distributions, there is no amount that the Trustee can be liable to be assessed and pay tax on under section 99 or 99A of the ITAA 1936. | Detailed Reasoning - Question 2: Will section 207-35 apply to include as assessable income of the Trustee, the Trustee's share of the franking credits on the franked dividend income distributed to them by the Estate? | Summary: Section 207-35 does not apply to the Trustee of Testamentary Trust A. Under Subdivision 207-B, subsection 207-50(4) deems that Testamentary Trust A's share of the franked distributions flows indirectly to the Executor and not the Trustee. The note to subsection 207-50(4) confirms that it cannot flow through to the Trustee because the subsection applies to the Executor. As the share of the franked distributions flows through to the Estate, any additional amount of assessable income, if any, would be assessable income of the Executor and not the Trustee. | Detailed Reasoning - Detailed reasoning: 27. Subsection 207-20(1) states: If an entity makes a *franked distribution to another entity, the assessable income of the receiving entity, for the income year in which the distribution is made, includes the amount of the *franking credit on the distribution. This is in addition to any other amount included in the receiving entity's assessable income in relation to the distribution under any other provision of this Act. 28. Subsection 207-35(1) applies if: (a) a *franked distribution is made in an income year to an entity that is a partnership or the trustee of a trust; and (b) the entity is not a *corporate tax entity when the distribution is made; and (c) if the entity is the trustee of a trust - the trust is not a *complying superannuation entity when the distribution is made; the assessable income of the partnership or trust for that income year includes the amount of the *franking credit on the distribution. 29. In applying subsection 207-35(1), the franked distribution was not made to the Trustee. 30. Subsection 207-35(2) states: The amount is in addition to any other amount included in that assessable income in relation to the distribution under any other provision of this Act. Note: The amount will affect the income tax liability of a partner in the partnership, or a beneficiary or the trustee of the trust: see Divisions 5 and 6 of Part III of the Income Tax Assessment Act 1936 31. This subsection explains that there is an additional amount of assessable income, equal to the franking credit on the distribution, which will impact the income tax liability of a beneficiary or the trustee of the trust under Division 6 of the ITAA 1936. 32. Subsection 207-35(3) states: Subsection (4) applies if: (a) a *franked distribution is made, or *flows indirectly, to a partnership or the trustee of a trust in an income year; and (b) the assessable income of the partnership or trust for that year includes an amount (the franking credit amount) that is all or a part of the additional amount of assessable income included under subsection (1) in relation to the distribution; and (c) the distribution flows indirectly to an entity that is a partner in the partnership, or a beneficiary or the trustee of the trust; and (d) disregarding Division 6E of Part III of the Income Tax Assessment Act 1936 , the entity has an amount of assessable income for that year that is attributable to all or a part of the distribution. 33. As the distribution didn't flow through to the Trustee, paragraph 207-35(3)(a) cannot be met, so subsections 207-35(3) and 207-35(4) do not apply to the Trustee. 34. Subsection 207-35(5) states: Subsection (6) applies if: (a) a *franked distribution is made, or *flows indirectly, to the trustee of a trust in an income year; and (b) the assessable income of the trust for that year includes an amount (the franking credit amount) that is all or a part of the additional amount of assessable income included under subsection (1) in relation to the distribution; and (c) disregarding Division 6E of Part III of the Income Tax Assessment Act 1936 , the trustee of the trust is liable to be assessed (and pay tax) in respect of an amount (the assessable amount) under section 98, 99 or 99A of that Act in relation to the trust. 35. As the distribution was not made to the Trustee and, as the note to subsection 207-50(4), confirms, the distribution didn't flow through to the Trustees, paragraph 207-35(5)(a) cannot be met, so subsections 207-35(5) and 207-35(6) do not apply to the Trustee. 36. As section 207-35 is not satisfied in relation to the Trustee, there is no amount that needs to be included in the assessable income of the Trustee in respect of their share of the franked distribution they received from the Estate. | Detailed Reasoning - Question 3: Will the Trustee be entitled under section 207-45 to a tax offset equal to their share of the franking credits on the franked dividend income distributed to them by the Estate? | Summary: No, as the franked distributions did not flow through to the Trustee, they are not entitled to a tax offset equal to a share of the franking credit on the franked distributions. | Detailed Reasoning - Detailed reasoning: 37. Subsection 207-20(2) states: The receiving entity is entitled to a *tax offset for the income year in which the distribution is made. The tax offset is equal to the *franking credit on the distribution. 38. Section 207-45 states: An entity to whom a *franked distribution *flows indirectly in an income year is entitled to a *tax offset for that income year that is equal to its *share of the *franking credit on the distribution, if it is: (a) an individual; or (b) a *corporate tax entity when the distribution flows indirectly to it; or (c) the trustee of a trust that is liable to be assessed on a share of, or all or a part of, the trust' s *net income under section 98, 99 or 99A of the Income Tax Assessment Act 1936 for that income year; or (ca) (Repealed by No 70 of 2015) (d) the trustee of a *complying superannuation entity, a *non-complying superannuation fund or a *non-complying approved deposit fund in relation to that income year. Note: The entities covered by this section are the ultimate recipients of the distribution because the distribution does not flow indirectly through them to other entities. As a result they are also the ultimate taxpayers in respect of the distribution and are given the tax offset to acknowledge the income tax that has already been paid on the profits underlying the distribution. 39. In applying subsection 207-50(4) and consistent with the note to this subsection, Testamentary Trust A's share of the franked distribution is deemed to flow through to the Executor, not the Trustee. 40. As Testamentary Trust A is an entity and the franked distributions do not flow indirectly to Testamentary Trust A, section 207-45 does not apply to the Trustee and thus the Trustee is not entitled to a tax offset under Division 207. [1] In this instance the Executors paid the franked distribution it received to beneficiaries using the percentages set down in Appendix A of their resolution. [2] Listed beneficiary types are a body, association, fund or organization the income of which is exempt from tax by virtue of the operation of Subdivision 50-A or section 51-5, 51-10 or 51-30 of the ITAA 1997 , or an organization the income of which is exempt from tax by virtue of a regulation in force under the International Organisations (Privileges and Immunities) Act 1963 . [3] Item 4 only applies where a *franked distribution *flows indirectly to the trustee as a partner in a partnership or as a beneficiary of another trust.