Private ruling: Frankable distributions
Published: December 2012
Ruling period: Year ending 30 June 2012 | Year ending 30 June 2013 | Year ending 30 June 2014 | Year ending 30 June 2015 | Year ending 30 June 2016
Date scheme commenced: 1 July 2011

Ruling: Q1: Can you pay a franked dividend out of foreign country sourced income which originated from an overseas trust and which is distributed to you from an Australian trust beneficiary of the foreign country trust, to the extent of your available franking credits? | A1: Yes.

Relevant facts and circumstances: An Australian resident trust will be in receipt of a distribution from a foreign country trust in relation to the sale of overseas land completed in 20XX. The land was acquired by the foreign country trust in 200Y. You are a possible beneficiary of the Australian resident trust.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 202-40 | Income Tax Assessment Act 1997 Section 202-45

Reasons for decision: Summary: Section 202-40 of the Income Tax Assessment Act 1997 (ITAA 1997) provides a distribution is a frankable distribution to the extent that it is not unfrankable under section 202-45. Section 202-45 of the ITAA 1997 provides the following distributions are unfrankable: § distributions from profits sourced in Norfolk Island from companies that are resident there § distributions made in respect of shares that are treated as debt (called nonequity shares) § distributions funded from certain capital reserves of the company § distributions made by Authorised Deposit-taking Institutions in relation to instruments that are characterised as non-share equity § distributions made in relation to an instrument characterised as an equity interest (non-share equity) where the distribution exceeds available frankable profits § deemed dividends, in accordance with Division 7A of the ITAA 1936, being payments or loans made by private companies to their members (or to their associates) § deemed dividends in relation to excessive payments made by a private company to its shareholders, directors and associates § distributions to controlled foreign companies that are deemed to be dividends under section 47A of the ITAA 1936 § deemed dividends in relation to capital streaming and dividend substitution arrangements § distributions made in relation to off-market buy backs of equity interests where the amount paid in respect of the buy-back exceeds the market value of the equity interest § demerger dividends, and § certain distributions by a New Zealand franking company. In your case, as foreign sourced capital gains income is not listed in section 202-45 of the ITAA 1997 as an unfrankable distribution, distributions you make from income received from the foreign country trust are frankable (to the extent of your available franking credits).

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