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AJML Accountants Update – July 2016

Guide on Trust Funds – Part 19

What rules apply when a trustee streams franked dividends

Where a trust derives franked dividends, the amendments made by Bill 5 now ensure that those franked dividends can be ‘streamed’ to one or more beneficiaries. The importance of this is that the trustee can direct the franked dividends to those beneficiaries that can make the best use of the attached franking credits.

The new ‘streaming’ provisions are contained in Subdivision 207-B of the ITAA 1997

In order for a trustee for the trustee to effectively ‘stream’ franked dividends there are a number of rules that must be complied with, as follows;

  • The trust deed must allow for streaming – refer to earlier discussion;
  • The franked dividend must be distributed in its character as a franked dividend;
  • The resolution must specifically refer to the amount/proportion of the income that is being distributed as a franked dividend.
  • The distribution purporting to stream the franked dividend must be in writing no later than the 30 June financial year end.
  • The franked dividend is taken to be streamed to a beneficiary to the extent they are entitled to the ‘net financial benefit’ attributable to the franked dividend, which is the cash dividend less directly relevant expenses such as interest;
  • It is only necessary for the ‘net’ dividend to be distributed
  • The beneficiary’s share of the franked dividend is included in their assessable income
  • Each beneficiary to whom a franked dividend is streamed will be entitled to portion of the franking credits based on their percentage share of the total franked dividends;
  • The beneficiary’s share of the franking credit is included in their assessable income
  • Franking credits can only be passed out to beneficiaries if there is at least $1 of trust income and net (taxable) income.
  • If the directly relevant expenses exceed the cash amount of the franked dividend, there is no amount of franked dividend that can be streamed;
  • In this case, the beneficiaries entitled to the other income of the trust will be entitled to the franking credits based on their adjusted Division 6 percentage
  • If the trust is in an overall loss position, the franking credits cannot be passed to the beneficiaries.
  • If some shares are negatively geared and other are not then, as long as there is a ‘net’ amount when all the franked dividends are taken into account, that ‘net’ amount can be streamed
  • If there is no net amount, the trustee can only stream the franked dividends paid on the shares that are not negatively geared.
  • If the net franked dividends exceed the net (taxable) income of the trust (due to other losses in the trust), to ensure all the franking credits are passed out to the beneficiaries, the trustee should not attempt to stream any of the franked dividends;
  • Net franked dividends whether streamed or not), together with franking credits are extracted from the net (taxable income and disclosed separately in the Statement of distribution and also in the beneficiary’s return.