Franking credits, losses and discretionary trusts

Hi

I’m struggling with a few issues and would be grateful for some help.

Our discretionary trust was set up in 06/07. No family trust election has been made and no distributions have been made. It has $1500 in carried over income losses from 06/07. This year it has some income losses and some capital losses. It has also received franked dividends in 07/08.

My 3 questions are:

1. my understanding is that beneficiaries can only benefit from franking credits if the trust makes positive income: is that correct?

2. does the positive income (referred to in 1) have regard to CAPITAL gains/losses or just income? Ie, if interest/dividend income is +100 but the capital losses are, say, -2000, can beneficiaries benefit from the franking credit or are the franking credits lost because the trust is negative for the year OVERALL?

3. if it is possible to distribute the franking credits to a beneficiary, and this is done, are there any risks we should be aware of with respect to benefiting from carried over losses in the future (eg re family trust election etc / carefully selecting beneficiary etc)?

Thanks in advance for your help.

 

FIRST CHECk YOUR TRUST DEED regarding whether trust income is similar to taxable income.

For tax law:

1) There must be at least $1 of net income (taxable income) before franking credits can be distributed - all franking credits would be available, not just a proportion.

2) Net income includes all assessable income (dividends + credits + realised net capital gains - allowable deductions - carry forward losses). You don't sett of capital losses agains other assessable income.

3) Stream franking credits to the beneficiaries who get the dividend distribution.

Cheers,

Rob

 

Thanks Rob

A quick follow up:

1. If the trust’s net income is $1 but the franking credits are, say, $2000, how does the beneficiary report this in their personal tax return. Do they report all $2001 as revenue as well as a $2000 franking credit, or do they only report $1 income + $2000 in franking credits (thus, taking $1999 off their tax liability)?

2. To make sure I’ve understood correctly, would the following scenario result in $1 of net income thus allowing Franking credits to be streamed (assuming all ok with the definitions in the Deed):

Dividends received: 700
Franking credits 300
Carry over losses -100
Interest expenses -899
Capital losses -2000 (but not included? Simply carried fwd to offset cap gains in the future?)


Thanks again
Sam

 

1) The tax return does not double count the franking credits. Only your personal investement franking credits get grossed up, then the net income from non-primary production in the supplementary section gets added in. The attached (streamed) franking credits are just listed in the supplement.

2) Assuming the deed is OK, the distribution is effective and you have kept adequate accounting records to allow streaming of different income types.

For these reasons, I suggest you get your Accountant to check over the deed, resolution and records to avoid any dispute with the ATO.

Cheers,

Rob

 

Thanks very much for your help, Rob.