Tax Laws Amendment (2004 Measures No. 2) Act 2004 (83 of 2004)

Schedule 10   Franked distributions received through certain partnerships and trustees

Part 2   Amendments commencing on 29 June 2002

Income Tax Assessment Act 1997

7   Subdivision 207-B

Repeal the Subdivision, substitute:

Subdivision 207-B - Franked distribution received through certain partnerships and trustees

Guide to Subdivision 207-B

207-25 What this Subdivision is about

This Subdivision deals with an entity that receives a benefit of a franked distribution where:

(a) the distribution is made to a partnership or the trustee of a trust; and

(b) the benefit is received either directly or through other interposed partnerships or trusts.

The distribution is regarded as flowing indirectly to the entity under this Subdivision.

On the basis of a notional amount of the entity's share of the distribution, the entity may be entitled to have an amount included in its assessable income and/or a tax offset under this Subdivision.

Table of sections

Gross-up and tax offset

207-30 Applying this Subdivision

207-35 Gross-up - distribution made to, or flows indirectly through, a partnership or trustee

207-45 Tax offset - distribution flows indirectly to an entity

Key concepts

207-50 When a franked distribution flows indirectly to or through an entity

207-55 Share of a franked distribution

207-57 Share of the franking credit on a franked distribution

[This is the end of the Guide.]

Gross-up and tax offset

207-30 Applying this Subdivision

This Subdivision applies subject to Subdivisions 207-D, 207-E and 207-F.

Note 1: Subdivision 207-D sets out the cases in which the gross-up and tax offset rules in this Subdivision and Subdivision 207-A will not apply because the franked distribution (or a share of it) would not have been taxed in any case.

Note 2: Subdivision 207-E sets out the exceptions to the rules in Subdivision 207-D.

Note 3: Subdivision 207-F sets out the cases in which the gross-up and tax offset rules in this Subdivision and Subdivision 207-A will not apply because the imputation system has been manipulated in a way that is not permitted under the income tax law.

207-35 Gross-up - distribution made to, or flows indirectly through, a partnership or trustee

Additional amount of assessable income

(1) If:

(a) a *franked distribution is made in an income year to an entity that is a partnership or the trustee of a trust; and

(b) the entity is not a *corporate tax entity when the distribution is made; and

(c) if the entity is the trustee of a trust - the trust is not a *complying superannuation entity when the distribution is made;

the assessable income of the partnership or trust for that income year includes the amount of the *franking credit on the distribution.

(2) The amount is in addition to any other amount included in that assessable income in relation to the distribution under any other provision of this Act.

Note: The amount will affect the income tax liability of a partner in the partnership, or a beneficiary or the trustee of the trust: see Divisions 5 and 6 of Part III of the Income Tax Assessment Act 1936.

Allocation of the additional amount of assessable income

(3) Despite any provisions in Divisions 5 and 6 of Part III of the Income Tax Assessment Act 1936, if:

(a) a *franked distribution is made, or *flows indirectly, to a partnership or the trustee of a trust in an income year; and

(b) the assessable income of the partnership or trust for that year includes an amount (the franking credit amount ) that is all or a part of the additional amount of assessable income included under subsection (1) in relation to the distribution; and

(c) the distribution flows indirectly to an entity that is a partner in the partnership, or a beneficiary or that trustee of the trust; and

(d) the entity has an amount of assessable income for that year that is attributable to all or a part of the distribution;

then, the entity's assessable income for that year also includes so much of the franking credit amount as is equal to its *share of the *franking credit on the distribution.

Example: A franked distribution of $70 is made to the trustee of a trust in an income year. The trust also has $100 of assessable income from other sources. Under subsection (1), the trust's assessable income includes an additional amount of $30 (which is the franking credit on the distribution). The trust has a net income of $200 for that income year.

There are 2 beneficiaries of the trust, P and Q, who are presently entitled to the trust's income. Under the trust deed, P is entitled to all of the franked distribution and Q is entitled to all other income.

The distribution flows indirectly to P (as P is entitled to a share of that net income and has a 100% share of the distribution under section 207-55). P therefore has an amount of assessable income that is equal to its share of the distribution. Under this subsection, P's assessable income also includes the full amount of the franking credit (as P's share of the franking credit on the distribution is $30 under section 207-57). Q's share of the net income therefore does not include any of the franking credit.

207-45 Tax offset - distribution flows indirectly to an entity

An entity to whom a *franked distribution *flows indirectly in an income year is entitled to a *tax offset for that income year that is equal to its *share of the *franking credit on the distribution, if it is:

(a) an individual; or

(b) a *corporate tax entity when the distribution flows indirectly to it; or

(c) the trustee of a trust that is liable to be assessed on a share of, or all or a part of, the trust's *net income under section 98, 99 or 99A of the Income Tax Assessment Act 1936 for that income year; or

(d) the trustee of an eligible entity within the meaning of Part IX of that Act in relation to that income year.

Note 1: Certain superannuation funds, ADFs and PSTs are eligible entities within the meaning of Part IX of the Income Tax Assessment Act 1936.

Note 2: The entities covered by this section are the ultimate recipients of the distribution because the distribution does not flow indirectly through them to other entities. As a result they are also the ultimate taxpayers in respect of the distribution and are given the tax offset to acknowledge the income tax that has already been paid on the profits underlying the distribution.

Key concepts

207-50 When a franked distribution flows indirectly to or through an entity

(1) For the purposes of this Subdivision, this section sets out the only circumstances in which a *franked distribution:

(a) flows indirectly to an entity (subsection (2), (3) or (4)); or

(b) flows indirectly through an entity (subsection (5)).

Partners

(2) A *franked distribution flows indirectly to a partner in a partnership in an income year if, and only if:

(a) during that income year, the distribution is made to the partnership, or *flows indirectly to the partnership as a beneficiary because of a previous application of subsection (3); and

(b) the partner has an individual interest:

(i) in the partnership's *net income for that income year that is covered by paragraph 92(1)(a) or (b) of the Income Tax Assessment Act 1936; or

(ii) in a *partnership loss of the partnership for that income year that is covered by paragraph 92(2)(a) or (b) of that Act;

(whether or not that individual interest becomes assessable income in the hands of the partner); and

(c) the partner's *share of the distribution under section 207-55 is a positive amount (whether or not the partner actually receives any of that share).

Beneficiaries

(3) A *franked distribution flows indirectly to a beneficiary of a trust in an income year if, and only if:

(a) during that income year, the distribution is made to the trustee of the trust, or *flows indirectly to the trustee as a partner or beneficiary because of a previous application of subsection (2) or this subsection; and

(b) the beneficiary has this amount for that income year (the share amount ):

(i) a share of the trust's *net income for that income year that is covered by paragraph 97(1)(a) of the Income Tax Assessment Act 1936; or

(ii) an individual interest in the trust's net income for that income year that is covered by paragraph 98A(1)(a) or (b), or paragraph 100(1)(a) or (b), of that Act;

(whether or not the share amount becomes assessable income in the hands of the beneficiary); and

(c) the beneficiary's *share of the distribution under section 207-55 is a positive amount (whether or not the beneficiary actually receives any of that share).

Trustees

(4) A *franked distribution flows indirectly to the trustee of a trust in an income year if, and only if:

(a) during that income year, the distribution is made to the trustee, or *flows indirectly to the trustee as a partner or beneficiary because of a previous application of subsection (2) or (3); and

(b) the trustee is liable or, but for another provision in this Act, would be liable, to be assessed in respect of an amount (the share amount ) that is:

(i) a share of the trust's *net income for that income year under section 98 of the Income Tax Assessment Act 1936; or

(ii) all or a part of the trust's net income for that income year under section 99 or 99A of that Act;

(whether or not the share amount becomes assessable income in the hands of the trustee); and

(c) the trustee's *share of the distribution under section 207-55 is a positive amount (whether or not the trustee actually receives any of that share).

Note: A trustee to whom a franked distribution flows indirectly under this subsection is entitled to a tax offset under section 207-45 and the distribution does not flow indirectly through the trustee to another entity.

(5) A *franked distribution flows indirectly through an entity (the first entity ) to another entity if, and only if:

(a) the other entity is the focal entity in an item of the table in section 207-55 in relation to the distribution; and

(b) that focal entity's *share of the distribution is based on the first entity's share of the distribution as an intermediary entity in that or another item of the table.

Example: A franked distribution of $140 is made to a partnership. An amount equal to the franking credit on the distribution ($60) is included in the partnership's assessable income under section 207-35. Because the partnership has losses of $300 from other sources, it has a partnership loss of $100 for the income year.

The partnership has 2 equal partners. One partner is the trustee of a trust and the other partner is an individual. The distribution flows indirectly to each partner under subsection (2). Each partner has a share of the partnership loss ($50), a share of the distribution under sections 207-55 ($70) and a share of the franking credit under section 207-57 ($30).

The individual partner is allowed a tax offset of $30 under section 207-45.

Because the trust has $100 of income from other sources, it has a net income of $50 for that income year ($100 minus the share of the partnership loss of $50).

The trust has one individual as a beneficiary, to whom the distribution flows indirectly under subsection (3). The beneficiary's share of the franked distribution is $70 under sections 207-55 and its share of the franking credit is $30 under section 207-57. The beneficiary is therefore allowed a tax offset of $30 under section 207-45.

207-55 Share of a franked distribution

Object of section

(1) The object of this section is to ensure that:

(a) the amount of a *franked distribution made to a partnership or the trustee of a trust is allocated notionally amongst entities who derive benefits from that distribution; and

(b) that allocation corresponds with the way in which those benefits were derived.

Note: An entity can derive a benefit from the distribution (and therefore has a share of the distribution) without actually receiving any of the distribution: see subsection (2) of this section and the example at the end of section 207-50.

(2) An entity's share of a *franked distribution is an amount notionally allocated to the entity as its share of the distribution, whether or not the entity actually receives any of that distribution.

(3) That amount is equal to the entity's share of the distribution as the focal entity in column 3 of an item of the table.

Note: An entity's share of the distribution is based on the share of the distribution of each preceding intermediary entity through which the distribution flows, starting from the intermediary entity to whom the distribution is made.

This means that in some cases (see items 2 and 4), more than one item of the table will need to be applied to work out the share of the distribution of an ultimate recipient of the distribution.

Note: In item 3 or 4, the trustee of a trust can be both the intermediary entity and the focal entity in the same item.

207-57 Share of the franking credit on a franked distribution

(1) An entity's share of a *franking credit on a *franked distribution is an amount notionally allocated to the entity as its share of that credit, whether or not the entity actually receives any of that credit or distribution.

(2) Work out that amount as follows:

Amount of the franking credit on the franked distribution * (Entity's share of the franked distribution / Amount of the franked distribution)