×

Non-fixed trusts

Non-fixed-trusts

Are beneficiaries entitled to franking credits?

Family Trust Elections (FTEs) offer a significant advantage to non-fixed trusts in a carry forward loss context. Once the trustee of a discretionary trust makes an FTE and becomes a “family trust” for income tax purposes, the complex trust loss rules suddenly become much easier to pass.

When focusing on the issues of losses, however, many advisers overlook the importance of FTEs in other contexts – such as in relation to franking credits.


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 tax@redchip.com.au.

Back to Articles
Redchip

Recent Articles

Signing a contract or agreement. Banker or lawyer showing client the line for autograph in a document paper. Business man with a customer in office making deal. Employee hired.
Asset Protection Presentation

In our February event, Wednesdays With Redchip, our presenters Ian Tindale and Trung Vu looked at asset protection strategies. View the slides from this presentation here.

Read more
4k-wallpaper-clock-countdown-1447235
Is time up for your PPSR registration?

With the seven year anniversary of the PPSR approaching, over 100,000 registrations are likely to be facing expiration. If your security interest expires, it cannot be renewed.

Read more
The Bull
What to do when the ATO comes knocking

Experts from our Tax and Insolvency teams recently spoke to a close group of accountants from our network about proactively dealing with the ATO and how to respond if the ATO escalates to recovery action.

Read more