Trusts: No Power to Separately Stream Franking Credits

The High Court has recently decided a case that has potential to have a significant impact on the distribution of income from trusts involving franking credits.  Franking credits accrue when a corporation distributes profits by way of dividend and attaches to the dividend a credit for the tax paid by the corporation.  The way franking credits work is that the taxpayer who received the franked distribution will be entitled to a tax offset equal to the franking credit on the distribution.

Most Discretionary Trust deeds contains clauses allowing the Trustees to choose which beneficiaries receive distributions and to stream different classes of income to different beneficiaries.  Many Trust deeds purport to give the Trustees power to separately stream franking credits i.e. to give the franking credit to one beneficiary whilst the income is distributed to a different beneficiary.

The recent High Court decision has confirmed that no matter what the Trust deed says, a Trustee does not have power to depart from the notional outcome determined under the Tax law.  The Tax law provides for franking credits to be allocated in the same proportions in which the beneficiaries receive the franked income.

What the High Court decision means is that a Trustee cannot stream a franking credit to one beneficiary while allocating the underlying income to a different beneficiary.  Rather the franking credit can only be used by the beneficiary that receives the distribution of income to which the credit is attached.

It is likely that the decision has potential to impact many Trust distributions, as the view that the franking credits could be streamed separately to the underlying income was a view held by a considerable number of accounting and tax advisors.  Indeed, the view that franking credits could be separated had previously been accepted as correct in a decision in the Supreme Court of Queensland.

If you have a Trust structure and believe you may be affected by this, you should obtain legal and accounting advice.