Tax Laws Amendment (2011 Measures No. 5) Act 2011 (62 of 2011)

Schedule 2   Interim changes to the taxation of trust income

Part 1   Main amendments

Income Tax Assessment Act 1997

18   Subsection 207-35(3)

Repeal the subsection, substitute:

(3) Subsection (4) applies 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 the trustee of the trust; and

(d) disregarding Division 6E of Part III of the Income Tax Assessment Act 1936, the entity has an amount of assessable income for that year that is attributable to all or a part of the distribution.

(4) Despite any provisions in Divisions 5 and 6 of Part III of the Income Tax Assessment Act 1936, the entity’s assessable income for that year also includes:

(a) in the case of an entity that is a partner in a partnership - so much of the franking credit amount as is equal to the entity’s *share of the *franking credit on the distribution; and

(b) in the case of an entity that is a beneficiary of a trust:

(i) so much of the franking credit amount as is equal to the entity’s share of the franking credit on the distribution; and

(ii) the amount mentioned in section 207-37.

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 has a share of the trust’s net income that is covered by paragraph 97(1)(a) and has a share of the distribution under section 207-55 equal to 100% of the distribution).

Under this subsection, P’s assessable income includes $70 (the amount mentioned in section 207-37 (attributable franked distribution)) and 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 assessable income does not include any of the amount of the franked distribution or the franking credit.

(5) Subsection (6) applies if:

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

(b) the assessable income of the 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) disregarding Division 6E of Part III of the Income Tax Assessment Act 1936, the trustee of the trust is liable to be assessed (and pay tax) in respect of an amount (the assessable amount ) under section 98, 99 or 99A of that Act in relation to the trust.

(6) Despite any provisions in Division 6 of Part III of the Income Tax Assessment Act 1936, for the purposes of that Division, increase the assessable amount by so much of the franking credit amount as is equal to:

(a) if the trustee of the trust is liable to be assessed (and pay tax) under section 98 of that Act - the sum of:

(i) the trustee’s *share of the *franking credit on the distribution in respect of the beneficiary; and

(ii) the amount mentioned in section 207-37; or

(b) if the trustee of the trust is liable to be assessed (and pay tax) under section 99 or 99A of that Act - the sum of:

(i) the trustee’s share of the franking credit on the distribution; and

(ii) the amount mentioned in section 207-37.