Private ruling: Franked distribution
Date of advice: 5 August 2021
Published: February 2022
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Are you (the Trustees, hereafter referred to as 'the Executors') liable to be assessed and pay tax under sections 99 or 99A of the Income Tax Assessment Act 1936 (ITAA 1936) on that part of the section 95 of the ITAA 1936 net income of the Estate for the year ended 30 June 20XX as comprises franked dividends that are Type A Proceeds that you are required to distribute in accordance with clause X of the Will? | A1: No.

Relevant facts and circumstances: Clause X of the Will: • identified certain assets held by the deceased person at the time of their death; • allowed for the sale of those assets while directing that any proceeds (the Type A Proceeds) from the sale to be distributed to identified beneficiaries at a set percentage; and • stated that the Type A Proceeds could include a dividend on shares included in those assets. Clause X also allows for proceeds that are not Type A Proceeds (other Proceeds) to be distributed under another clause of the Will. During the year ended 30 June 2020 the Executors received franked distributions that they determined were Type A Proceeds. The Executors then paid the beneficiaries identified in clause X a share of the franked distribution at the relevant percentages identified in that clause. The Executors completed a record of payment which identified the amount of franked distribution they received and referred to the distribution in the record of payment as a franked distribution received. The record of payment also listed the amount that was paid to each beneficiary. The record of payment was made before 30 June 2020. The Executors also completed a resolution in which they resolved that the identified beneficiaries in clause X were entitled to trust income that constitutes Type A Proceeds. This resolution also referenced Type A Proceeds that were franked distributions. The resolution was completed before 30 June 2020.

Relevant legislative provisions: Income Tax Assessment Act 1936 Division 6 | Income Tax Assessment Act 1936 Division 6E | Income Tax Assessment Act 1936 section 95 | Income Tax Assessment Act 1936 section 95AAA | Income Tax Assessment Act 1936 section 98 | Income Tax Assessment Act 1936 section 99 | Income Tax Assessment Act 1936 section 99A | Income Tax Assessment Act 1997 Subdivision 207-B | Income Tax Assessment Act 1997 section 207-50 | 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 paragraph 207-55(4)(a) | Income Tax Assessment Act 1997 subparagraph 207-55(4)(a)(i) | Income Tax Assessment Act 1997 paragraph 207-55(4)(b) | Income Tax Assessment Act 1997 subsection 207-58(1) | Income Tax Assessment Act 1997 subsection 960-120(1) | Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision: Summary: Although clause X refers to proceeds from sale of assets, the proceeds will be assessable income if they are: (a) income in the ordinary sense of the word (ordinary income) [1] ; or (b) an amount or benefit that through the operation of the provisions of the tax law is included in assessable income (statutory income). [2] In respect of the (b) above, Subdivision 207-B contains the statutory provisions that determine how franked distributions are bought to tax. As a group, the beneficiaries identified in clause X were specifically entitled to 100% of the franked distributions the Estate concluded were Type A Proceeds received because the Executors were required by the terms of the Will to make the payments. The beneficiaries were then paid a share of the franked distribution based on the percentages set down in Clause X. The record of payment confirms the beneficiaries were paid that share of the franked distribution. As the beneficiaries entitled to amounts under clause X are, as a group, specifically entitled to 100% of the franked distribution distributed in accordance with the percentages set down in the clause, the Executors of Estate are not liable to be assessed and pay tax under sections 99 or 99A of the ITAA 1936 on that part of the section 95 of the ITAA 1936 net income of the Estate for the year ended 30 June 2020 that is the franked distributions that comprised of Type A Proceeds distributed in accordance with clause X of the Will. | Detailed Reasoning - Background - income of the trust: The net income of a trust estate is defined in section 95 of the ITAA 1936: 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. Paragraphs 82 to 90 of Draft Taxation Ruling TR 2012/D1 Income tax: meaning of 'income of the trust estate', which contains the Commissioner's considered but not final view on the income of a trust estate, are as follows: 82. The income considered for Division 6 purposes is that of a 'trust estate'. 83. The expression 'trust estate' is not defined for the purposes of Division 6, although it is generally taken to mean the estate which is vested in a trustee, that is, the trust property. 84. Comments of the majority of the High Court in FCT v. Everett support the view that 'trust estate' is synonymous with 'trust property'. In that case, the taxpayer assigned to his wife a share of his interest in a partnership which carried with it an entitlement to receive a share of the future income attributable to it. Consequently an immediate trust was established of a proprietary right which yielded or earned future income. 85. The Commissioner assessed the taxpayer in respect of the share of partnership profits paid to the taxpayer's wife in respect of the 1973 income year. The Commissioner had argued that the profits payable to the taxpayer's wife were not net income in relation to a trust estate for the purposes of section 95. The Court observed The appellant's contention is that the income payable to the respondent's wife was not, as the majority in the Federal Court held, 'the net income of a trust estate'' within the meaning of sec. 95 of the Act. The argument is based very largely on the proposition, founded on the judgment of Kitto J. in Stewart Dawson Holdings Pty. Ltd. v. F.C. of T. (1965) 39 A.L.J.R. 300, at p. 301, that income derived by a trustee from his own property or by means of his personal exertion, 'income with respect to which a trust arises at the moment of derivation'', does not answer the statutory description. Kitto J. was making the point that when a person establishes a trust of his future income simpliciter, the income when it is derived is the subject matter or corpus of the trust, not the fruit of it. To use the terminology of sec. 95, it is because the income is the 'trust estate'' that it cannot be 'the net income of'' that trust estate. His Honour's remarks do not touch the case where an immediate trust is established of a proprietary right which yields or earns future income. Then the income is accurately described as income of a trust estate. For reasons which we have already given, this is the situation which obtains here. 86. The many references in Division 6 to the 'income of the trust estate' show that the trust estate and its income are distinct concepts, the income being the product of the estate. The distinction was most recently commented upon by the Full Federal Court in Leighton v. Commissioner of Taxation . In that case, Mr Leighton was the trustee of a trust for the benefit of two companies, Salina and Kolton, and the Full Federal Court observed: The share sale proceeds deposited... into the Westpac Bank account in Mr Leighton's name... did not represent the income of either Salina or Kolton but rather represented the realisation of the income... already derived by these companies. Upon being deposited, the proceeds were impressed with a trust in favour of Salina and Kolton, but they did not comprise the income of a trust estate. Rather, those deposited proceeds constituted or augmented a trust estate of which Mr Leighton was trustee. The income of that trust estate was such income, if any, as was later derived from the investment of that trust estate, e.g. any bank interest on the deposited proceeds. 87. As the trust estate and its income are distinct concepts, it follows that something which formed part of the trust estate at the start of an income year cannot itself be income for that year. 88. It would seem that in determining the product of (or income flowing from) the trust estate, the trust estate should be thought of in broad terms so as to include, for example, any rights the trustee has to be considered as a discretionary object in other trusts. 89. The income, being a product of, or a flow from, the trust estate, must represent, in total, an actual accretion to the trust estate for the relevant period. In other words, that which is 'income' cannot in total exceed (although it can be less than) the yield or accretion to the fund for the relevant period. And it must represent an accretion that, following its production, is capable of adhering to, or forming part of, the trust estate. However, in this context an accretion need not be a realised gain - it may in appropriate cases reflect an unrealised gain which represents an increase in value which has accrued to the trust. 90. Where the income of a trust is defined by reference to its net income, it may often be the case that an amount which purportedly forms part of the trust income does not represent anything flowing to or coming home to (or an accretion to) the trust estate. These amounts are described in this draft Ruling as notional amounts - see discussion in paragraph 6. In applying paragraphs 87 and 89 in respect of the assets identified in clause X of the Will, those that had not yet been sold were part of the Estate as at 1 July 2019. When each individual asset is subsequently sold, the sale could potentially produce 'an actual accretion to the trust estate' that will be income of the Estate. A franked distribution, such as the franked distributions received by the Estate are income of the Estate in the year ended 30 June 2020. Although income of the trust, franked distributions are brought to tax under Subdivision 207-B, as summarised in paragraphs 3 to 5 of TR 2012/D1: 3. 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 Income Tax Assessment Act 1997 (ITAA 1997) respectively. 4. The balance of the net income (that is the net income excluding capital gains and franked distribution) of the trust is still assessed under Division 6 in the manner described in paragraph 2, but modified by Division 6E of Part III (Division 6E). 5. Division 6E adjusts the rules in Division 6 to ensure that capital gains and franked distributions are not taxed twice (that is, as a result of Subdivisions 115-C or 207-B of the ITAA 1997 and Division 6). In broad terms the effect of Division 6E is to apply Division 6 on the assumption that net capital gains and franked distributions are excluded from the trust's net income, and any amount relating to these things is excluded from the income of the trust estate. Clause X provides for the powers of the Executors and overrides any other powers in respect of proceeds that may apply elsewhere in the Will. | Detailed Reasoning - Background how income of the trust is taxed: There are various statutory provisions within the ITAA 1936 and the ITAA 1997 that deals with how the net income of a trust is taxed and the interaction between these provisions is outlined in section 95AAA of Division 6 of the ITAA 1936, which states: The following is a simplified outline of the relationship between this Division, Division 6E and Subdivisions 115-C and 207-B of the Income Tax Assessment Act 1997 . This Division sets out the basic income tax treatment of the net income of the trust estate. Generally: (a) it has the result of assessing beneficiaries on a share of the net income of the trust estate based on their present entitlement to a share of the income of the trust estate; and (b) it has the result of assessing the trustee directly on any residual net income; and (c) as a collection mechanism, it has the result of assessing the trustee in respect of some beneficiaries, such as non-residents or those under a legal disability. If the trust estate has capital gains, franked distributions or franking credits, this basic treatment is modified as described below. Division 6E modifies the operation of this Division for the purpose of excluding amounts relevant to capital gains, franked distributions and franking credits from the calculations of assessable amounts under sections 97, 98, 99, 99A and 100. Division 6E does not modify the operation of this Division (or any other provision of this Act) for any other purpose. For example: (a) it does not modify the operation of this Division for the purposes of applying section 100A; and (b) it does not modify amounts taxed in the hands of the trustee under Subdivisions 115-C and 207-B of the Income Tax Assessment Act 1997 . Subdivisions 115-C and 207-B of the Income Tax Assessment Act 1997 provide the corresponding taxation treatment for those capital gains, franked distributions and franking credits. Specifically: (a) Subdivision 115-C of that Act has the effect that an amount corresponding to each of those capital gains is taxed in the hands of the beneficiaries of the trust (as a capital gain) and, if necessary, assessed to the trustee. (b) Subdivision 207-B of that Act has the effect that an amount corresponding to each of those franked distributions is taxed in the hands of the beneficiaries of the trust and, if necessary, the trustee. It also has the effect that the entity in whose hands those distributions are taxed can take advantage of the relevant amount of related franking credits. This section is a guide to the operating provisions and paragraphs 57 to 60 of Taxation Determination TD 2012/22 [3] provide a general overview of how net income of a trust is allocated for tax purposes. 57. Where a beneficiary is presently entitled to a share of the income of a trust estate, paragraph 97(1)(a) of the ITAA 1936 requires the beneficiary to include in their assessable income that share of the trust's net income. In Commissioner of Taxation v. Bamford , the High Court endorsed the proposition that beneficiaries can only be presently entitled to whatever is generally regarded as the distributable income of the trust (that is, the amount which can be distributed to beneficiaries or accumulated by the trustee). Further, the Court held that the reference to 'that share' meant the income to which the beneficiary was presently entitled as a proportion of the total trust income. 58. Under the proportionate approach, the amount to be included in a beneficiary's assessable income under paragraph 97(1)(a) of the ITAA 1936 is the product of a two step mathematical calculation. 59. The first step of that calculation involves determining the amount of income to which a beneficiary is presently entitled and converting that amount into a percentage share of the total trust income available for distribution. The second step involves applying that percentage to the net income of the trust. 60. The terms of a trust deed and the trustee's actions pursuant to it, including the way in which resolutions to distribute income are worded, are critical in determining the outcomes under the proportionate approach: see examples 1, 2, 3 and 4. How a franked distribution is allocated under Subdivision 207-B is summarised in paragraphs 66 to 68 and 74 to 76 of TD 2012/22: 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. 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. | Detailed Reasoning - Subdivision 207-B franked distributions: 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. As per the object and the note to subsection 207-55(1) and, subsection 207-55(2), section 207-55 can apply to an entity regardless of whether that entity received any of the franked distribution. The amounts that is to be allocated to an entity is determined under subsection 207-55(3), which states: 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. 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) As column 3 sets out, the focal entity's share of a franked distribution is determined under subsection 207-55(4), which 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. How subsection 207-55(4) should be interpreted is summarised in paragraphs 2.125 to 2.127 of the Explanatory Memorandum to the Tax Laws Amendment (2011 Measure No. 5) Bill 2011 (the EM): 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)] With reference to paragraph 2.125 of the EM, the Estate received the franked distributions and they flowed through to the beneficiaries listed in clause X of the Will. However, for subparagraph 207-55(4)(a)(i) to apply, these beneficiaries must be specifically entitled to an amount and specific entitlement is defined in subsection 207-58(1): A beneficiary of a trust estate is specifically entitled to an amount of a *franked distribution made to the trust estate in an income year equal to the amount calculated under the following formula: *Franked distribution × Share of net financial benefit Net financial benefit where: net financial benefit means an amount equal to the *financial benefit that is referable to the *franked distribution (after any application by the trustee of expenses that are directly relevant to the franked distribution). share of net financial benefit means an amount equal to the *financial benefit that, in accordance with the terms of the trust: (a) the beneficiary has received, or can be reasonably expected to receive; and (b) is referable to the *franked distribution (after application by the trustee of any expenses that are directly relevant to the franked distribution); and (c) is recorded, in its character as referable to the franked distribution, in the accounts or records of the trust no later than the end of the income year. This definition is explained in paragraphs 2.37 to 2.40 of the EM: 2.37 For streaming of capital gains and franked distributions to be effective for tax purposes, beneficiaries must be specifically entitled to them. That is: • the beneficiary must receive, or reasonably be expected to receive, an amount equal to the 'net financial benefit' referable to the capital gain or franked distribution in the trust; and • the entitlement must be recorded in its character as such in the accounts or records of the trust (see paragraph 2.62). [Schedule 2, item 11, section 115 228, item 24, section 207-58 and item 27, subsection 995-1(1)] 2.38 Broadly, a beneficiary will be specifically entitled to the fraction of the (gross) tax amount that equals their fraction of the net trust amount referable to the capital gain or franked distribution. For example, a beneficiary that receives an amount specified to be half of the trust's profit from the sale of an asset will generally be specifically entitled to half of the (tax) capital gain realised on the asset. [Schedule 2, item 11, subsection 115-228(1) and item 24, subsection 207-58(1)] 2.39 When a beneficiary has a specific entitlement to a capital gain or franked distribution, the associated tax consequences in respect of that distribution will apply to that beneficiary. Furthermore, the beneficiary will not be assessed on any share of the trust's taxable income over and above the amounts assessed because of Subdivisions 115-C and 207-B. 2.40 Capital gains and franked distributions to which no beneficiary is specifically entitled will flow proportionally to beneficiaries and/or the trustee based on their share of income of the trust excluding amounts to which any beneficiary is specifically entitled. This 'adjusted Division 6 percentage' is explained further in paragraphs 2.71 to 2.75. The franked distributions referred to and being tested in the formula as the distribution received by the Estate are the franked distributions received that were Type A Proceeds, trust income for the year and referable as franked distributions. The 'net financial benefit' is explained in paragraph 2.53 of the EM: The net financial benefit referable to a franked distribution will normally equal the amount of the franked distribution after being reduced by directly relevant expenses. Directly relevant expenses could include any annual borrowing expenses (such as interest) incurred in respect of the underlying shares (allocated rateably against any franked and unfranked dividends from those shares) or management fees incurred in respect of managing an investment portfolio of shares for the purpose of deriving dividend income (allocated against dividend income as relevant). The Executors have concluded that there are no expenses that are directly relevant to either franked distribution, so the net financial benefit is the amount of the franked distributions received. The next step is to establish the beneficiary's share of the franked distributions received. An amount a beneficiary has received is explained in paragraphs 2.44 of the EM: 2.44 A beneficiary has received an amount when, for example, it has been credited or distributed to them (including under a re investment agreement), or paid or applied on their behalf or for their benefit. As the Executors distributed the franked distributions they received, in the percentages set down in clause X, the beneficiaries entitled to those percentages were paid a share of the financial benefit from each franked distribution equal to their relevant percentage set down in clause X. The next step is to determine if these amounts were referable and recorded in their character as referable to a franked distribution in the Estate's records. What these records could consist of are included in paragraphs 2.62 and 2.64 of the EM: 2.62 The amount (or fraction) of the net economic benefit that the beneficiary has received or can reasonably be expected to receive must also be recorded in its character as referable to the capital gain or franked distribution in the accounts or records of the trust. [Schedule 2, item 11, paragraph 115 228(1)(c) and item 24, paragraph 207 58(1)(c)] 2.63 The accounts or records of the trust would include the trust deed itself, statements of resolution or distribution statements, including schedules or notes attached to, or intended to be read with them. However, a record merely for tax purposes is not sufficient. 2.64 The following resolutions or trust entitlements would satisfy the requirement of being 'recorded in its character as referable': • Under the trust deed, a beneficiary is entitled to all of the capital gains of the trust. • The trustee resolves to distribute all of the dividends of the trust to a beneficiary. • Under a trust deed that includes capital gains as income (either by default or because the trustee exercises a power to re-characterise the amount as income), a beneficiary is entitled to all of the profits made on or derived from an asset. • Under a trust deed that does not include capital gains as income, the trustee resolves to advance capital representing profits from the sale of a property equally to the beneficiaries. Clause X of the Will refers to dividends but does not make a specific reference to a franked distribution. As this clause refers to a dividend but not a franked distribution, it is not a record that is referable to a franked distribution'. In examining the meaning of distribution under subsection 960-120(1), Item 1 of the table to this subsection (which deals with a company), defines a distribution as 'a dividend, or something that is taken to be a dividend, under this Act'. Subsection 995-1(1) defines a franked distribution; 'a distribution is franked if an entity franks it in accordance with section 202-5'. In looking at clause X and applying the ITAA 1997 definitions of distribution and franked distribution, a franked distribution could be a dividend, but only after the Executors have concluded that the franked distribution was a dividend that is distributable under clause X. If the franked distribution, as a dividend, is a dividend identified as Type A Proceeds then clause X requires these proceeds to be distributed to a group of identified beneficiaries. In respect of the franked distributions the Estate received that the Executors determined were Type A Proceeds, the Executors distributed these franked distributions in accordance with the percentages set down in clause X of the Will. They also completed a record of payment to confirm that the amounts were paid at the percentages set down in clause X of the Will. The records of payment are the first two chronological records in which the Executors have referred to franked distributions being distributed at the percentages set down in clause X which would show the Executors concluded that those franked distributions were dividends that fell under definition of Type A Proceeds in clause X. As income of the trust that is referrable as a franked distribution, when determining the economic benefit to each beneficiary, the beneficiary only needs to reasonably expect to receive a share of the franked distribution. The records of payment also record that the Executors then paid the franked distributions to the beneficiaries at the percentages set down in required under clause X of the Will. In summary, the Executors; • received amounts that were franked distributions; • determined that, as dividends, the franked distributions were received in accordance with clause X of the Will; • allocated a share of each franked distribution to the beneficiaries identified at the percentages set down in clause X of the Will; • paid an amount based on the relevant percentage to each beneficiary; • recorded, before the end of the income year, in the records of payment, that they paid each beneficiary their share of the franked distribution at the percentages set down in clause X of the Will; and • completed, before the end of the income year, an Executors' resolution that was referable to franked distributions received by the Estate and the distribution to beneficiaries at the percentages set down in clause X on the basis that each franked distribution received was a Type A Proceed. Once the franked distributions were allocated, paid and recorded in the record of payment as having been paid to beneficiaries in accordance with clause X of the Will, the amounts paid and recorded as being paid as a share of a franked distribution represent each identified beneficiary's share of the net financial benefit of the franked distribution. The amounts paid will be the share of the franked distribution and, as a group, the beneficiaries listed in clause X will be specifically entitled to 100% of the franked distributions that the Estate received. As there is no amount remaining after determining specific entitlement, there is no amount paragraph 207-55(4)(b) can apply to. In looking at the Estate as the focal entity for the purposes of column 3 of Item 3 of subsection 207-55(3), the total of the franked distributions received were allocated to focal entities that are beneficiaries of the Estate. There is no share of either franked distribution allocated to the Estate under subsection 207-55(4), so the Estate's share of each franked distribution is nil. As there is no amount that applies to the Estate under column 3 of the table in subsection 207-55(3), there is no amount to be allocated to the Estate under section 207-55 in respect of the distributions that were Type A Proceeds. Section 207-50 describes when a franked distribution flows indirectly to an entity subsection 207-50(4) is the applicable subsection in respect 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. The Explanatory Memorandum 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)]. With reference to the last dot point immediately above and paragraph 207-54(4), the Estate's share of the distribution under section 207-55 is not a positive amount in respect of the franked distributions that were Type A Proceeds, so this paragraph has not been satisfied and section 207-50 will not apply to the Estate. Section 207-25, which is the guide to Subdivision 207-B, states: This Subdivision deals with an entity that receives a benefit of a franked distribution where: (a) the distribution is made to a partnership or the trustee of a trust; and (b) the benefit is received either directly or through other interposed partnerships or trusts. The distribution is regarded as flowing indirectly to the entity under this Subdivision. On the basis of a notional amount of the entity's share of the distribution, the entity may be entitled to have an amount included in its assessable income and/or a tax offset under this Subdivision. As there is no amount for the purpose of section 207-50 that flows through to the Estate in respect of the franked distributions the Executors received and determined were Type A Proceeds, then, as per the guide in section 207-25, there is not an amount in respect of these distributions that the Executors of the Estate would need to include in the Estate's assessable income under either section 99 or 99A of the ITAA 1936. [1] Section 6-5 [2] Section 6-10 [3] Taxation Determination TD 2012/22 Income tax: for the purposes of paragraph 97(1)(a) of the Income Tax Assessment Act 1936 (ITAA 1936) is a beneficiary's share of the net income of a trust estate worked out by reference to the proportion of the income of the trust estate to which the beneficiary is presently entitled

This ruling applies for the following period: | Reasons for decision: All legislative references are to the ITAA 1997 unless otherwise indicated. | Question: Are you (the Trustees, hereafter referred to as 'the Executors') liable to be assessed and pay tax under sections 99 or 99A of the Income Tax Assessment Act 1936 (ITAA 1936) on that part of the section 95 of the ITAA 1936 net income of the Estate for the year ended 30 June 2020 as comprises franked dividends that are Type A Proceeds that you are required to distribute in accordance with clause X of the Will?