News and Announcements

What are the new streaming provisions?

The new streaming provisions in division 6E of the Income Tax Assessment Act 1936 only apply where the trustee has the power to stream income under the terms of the trust.  The law does not permit streaming where the trust deed does not allow it.

How do they operate?

For streaming of capital gains and franked distributions to be effective for tax purposes, beneficiaries must be specifically entitled to them.  That is, the beneficiary must receive or reasonably be expected to receive an amount equal to the net financial benefit referrable to the capital gain or franked distribution in the trust and the entitlement must be recorded in its character as such in the accounts or records of the trust.

“Specific Entitlement” – what is it?

A beneficiary will be specifically entitled to the fraction of the gross tax amount that equals their fraction of the net trust amount referrable to the capital gain or franked distribution.  For example, a beneficiary who receives an amount specified to be one half of the trust’s profit from the sale of an asset will generally be specifically entitled to half of the tax capital gain realised on the asset.

A beneficiary is reasonably expected to receive a share of the net financial benefit which can be expressed as a share of the trust gain or distribution.  Alternatively, the entitlement can be expressed using a known formula, even though the result of the formula is calculated later.

Example: Resolution creating “specific entitlement”

The explanatory memorandum in paragraph 2.43 gives the following examples.  A trustee could resolve to distribute to a beneficiary:

• $50 referrable to a franked distribution;
• half of the trust gain realised on the sale of an asset (this is a fraction approach);
• the amount of a franked distribution remaining after calculating directly relevant expenses and distributing $10 to another beneficiary (a kind of net amount approach);
• 30% of a net dividends amount that includes all franked and unfranked distributions, less directly relevant expenses charged against the account, so long as the entitlement to net franked distributions can be determined;
• the amount of tax capital gain included in the calculation of the trust’s taxable income remaining after the application of the capital gains tax discount.  In such a case the beneficiary would generally be specifically entitled to only one half of the gain and that entitlement is taken to be made up equally of the taxable and discount parts of the gain.

What cannot be the subject of a “specific entitlement”?

• (a) No beneficiary can be specifically entitled to that part of a tax capital gain that arises by reason of the market value substitution rules.

• (b) No one can be specifically entitled to a notional or zero amount such as where the gross benefit has been reduced to zero by losses or by directly relevant expenses. 
• (c) No beneficiary can be specifically entitled to a deemed gain.
• (d) No beneficiary can be specifically entitled to franking credits by themselves.

The amount of the net economic benefit that the beneficiary has received or can reasonably be expected to receive must be recorded in its character and is referrable to the capital gain or franked distribution in the accounts or records of the trust.

Franked distributions

The trustee can deal with all franked distributions received by the trust as a single class and the provisions then apply to the total franked distributions as if they were a single franked distribution.

Therefore, if a beneficiary is entitled to receive all or a share of the entire class of net franked distributions of a trust and the class is in an overall gain position, then the beneficiary can be specifically entitled to all or a share of that entire class of the franked distributions, even if a particular franked distribution was more than offset by directly relevant expenses.  What matters is the trust deed distributing the franked distribution as a single class.  It is not sufficient that the trustee records the receipt of the franked distributions as a single class.

For franked dividends, a beneficiary’s entitlement must be recorded by the end of the income year.

Capital Profits

There is no provision within the amendment for the pooling of capital gains. It seems that the specific entitlement needs to be dealt with on an asset by asset basis, in direct contrast to the situation relating to franked distributions.

What needs to be done with trusts?

The trust deed must be examined to determine a number of issues, which include:

• how the trust deed determines the income;

• the mechanics involved in the determination - whether by resolution or minute;

• what the trust deed says as to how the income is allocated and by when; and

• what resolutions need to be put in place to ensure the distribution in the appropriate manner.

The trust deed should also be examined to determine whether it allows for different categories of income to be streamed and whether it allows for expenses to be debited against income or capital or different classes of income.

With deeds which give the trustee a discretion to determine income, if the deed does not specify the ability to include receipts or credits then the trustee does not have the power to distribute these amounts and capital profits may only be distributed through a capital advance.

Distribution through a capital advance requires a power on the part of the trustee to be able to distribute corpus before the vesting date of the trust. However, not all trust deeds provide for this.

Other trusts allow the trustee to determine the basis of the income on any basis and may have a backup provision for either ordinary income as the default position or tax income if the trustee fails to make a determination and allocation. It is prudent to ensure the right resolution is put in place, pursuant to the relevant form outlined in the trust deed.

Other trusts may simply provide that the income of the trust is determined on a tax basis, that is, section 95 of the Income Tax Assessment Act 1936.  In this case, any non-assessable capital profits can only be distributed via capital advance.

With capital profits, it is important to distribute the gross gain to the beneficiary to establish the beneficiary’s share of the net financial benefit.  If the gain is distributed on a discounted basis, that is, where only the capital gain calculated for capital gains tax purposes is included in the calculation of the trust’s net tax income remaining after the CGT discount capital gains tax concession, then the beneficiary would generally be specifically entitled to only one half of the gross amount of the gain.

It is helpful if the deed allows for distribution of a gross gain or capital profit, as part of the definition of income to avoid this situation.

Reckon Docs strongly recommend that you check your clients’ trust deeds to ensure they are updated to the current legislation, for example to allow income streaming and to address these income streaming issues discussed in this article.

Please contact us on 1300 139 001 for further information.

As the above update is only of a general nature, please obtain your own independent professional advice before acting on any information in this update.