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2016/02 - March

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Allocation of Franking Credits by Trustees

Published on 24 Feb 2016

A recent Federal Court decision has made it abundantly clear that franking credits must be allocated to beneficiaries in the same proportion as the relevant dividends.

The trustee of the Thomas Investment Trust had resolved to distribute the net income in proportions to an individual and a company. In a second resolution it resolved to distribute the franking credits in different proportions.

The trustee then sought and obtained directions from the Supreme Court of Queensland that franking credits were to be dealt with by the trustee and could be distributed to beneficiaries in accord with those trustee resolutions.

However in a later hearing the superior Federal Court decided that the Supreme Court orders could not operate to deprive the Taxation Commissioner of a right to make submissions on all questions of fact and law. Hence the Federal Court had to form its own conclusions.

The Federal Court further held that as neither “income” nor “net income” were defined in the Trust Deed they did not refer to assessable income under the tax acts (what is known as Section 95 net income).

Next the Federal Court held that franking credits were not “ordinary income.” They were not dividends or income under the trust deed and could not be streamed to particular beneficiaries. Hence a trustee resolution to allocate franking credits in different proportions to the franked dividends were not effective.

Thomas v. Federal Commissioner of Taxation (2015 ATC 20-526)


Andrew and Tony Lovett

22 February 2016

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