When can beneficiaries receive franking credits?
It is important to understand that under the current law a non-fixed trust (e.g. discretionary trust) receiving franked dividends may only pass the benefit of any attached franking credits to beneficiaries where either:
- The franking credits relate to shares acquired by the trust prior to 31 December 1997; or
- The franking credits relate to shares acquired by the trust after 31 December 1997 and the beneficiary is an individual who does not receive more than $5,000 in franking credits from all sources during the income year (the “small shareholder exemption”).
Clearly, the small shareholder exemption will not offer significant comfort to those of your clients adopting the structure of a trading company with its shares held solely by a discretionary trust. At some point it would be expected that large fully-franked dividends will flow into the trust – and beneficiaries will not want to lose the benefit of franking credits.
If your client cannot pass either of the above tests they may consider making an FTE.
How does an FTE work?
Becoming a “family trust” for income tax purposes means that the beneficiaries of the trust will be treated as “qualified persons” under the tax law – granting full access to franking credits provided the 45 day holding rule is passed.
In situations where the trust is a non-fixed unit trust with unrelated unitholders, you might instead consider making amendments to the deed and seeking the Commissioner’s discretion to have the trust regarded as “fixed” for tax purposes.
Whilst an FTE offers several advantages from an income tax perspective it is not appropriate in all cases. Furthermore, FTEs are difficult to revoke – so it’s critical to get the election right the first time.
For more information regarding FTEs and how they may affect other aspects of your clients affairs please contact us at firstname.lastname@example.org.