Trust Income Streaming

Update:  At least until the minimum 30% tax on trustees of non-fixed (discretionary) trusts becomes law and effective from 30 June 2028 onwards – it is worth revisiting the rules around making a beneficiary ‘specifically entitled’ to net capital gains or franked dividends. We state this because the 30% tax on discretionary trusts is still only an exposure draft but based on the draft, it is uncertain how franking credits attached to franked dividends received by a trustee will be dealt with under the new proposed tax rules.

Following on from the High Court decision in Bamford in 2010, uncertainty arose around the tax effectiveness of streaming particular types of income to beneficiaries. ‘Streaming’ and retaining the tax character of an amount in a beneficiary’s hands had been accepted by the ATO since the early 1990s, but Bamford cast doubt on whether a particular source of net income can be streamed given the proportionate approach to present entitlement to net income under s.97 of ITAA 1936. In 2011, Division 6E was inserted into the ITAA 1936 to allow specific entitlement and remove the doubt. This amendment only allows franked dividends and net capital gains to be streamed to a beneficiary with those amounts then removed from the usual Division 6 approach to a beneficiary being entitled to the same proportion of tax law income as they are to accounting or ‘distributable income’ of a trust.

Firstly, trustees should review trust deeds to ensure that the deed allows streaming of income to specific beneficiaries. Ideally, an effective clause should refer to ‘specific entitlement’ and so it may be advisable for deeds which are pre-2011 to be varied to include the concept of specific entitlement to franked dividends and net capital gains of a trust estate. The key requirements to allow a resolution whereby a beneficiary is made specifically entitled to franked dividends or net capital gains (such that Division 6E can be applied) are that:

• the trustee records the specific entitlement in the books of the trust by 30 June each year;
• there is a net financial benefit referable to the trust’s net capital gain or franked dividends that will actually be paid to the beneficiary; and
• for the beneficiary to utilise the franking credit under the ‘qualified person’ holding rules: a family trust election has been made and lodged with the ATO.

More general considerations will still exist around whether there is actually any accounting/distributable income (if not then tax law income cannot be allocated to beneficiaries) and if not, whether an equalisation clause or other trustee power can be exercise by midnight on 30 June so as to deem tax law income amounts as being accounting/distributable income amounts.

If you have any queries regarding these matters please contact Marco Saccotelli on +61 3 8600 6098