Superannuation Fund - entitlement to franking rebate as a beneficiary of a trust

Is the trustee of the superannuation fund, who is a beneficiary of a unit trust, entitled to the benefit of franking rebate, under section 160AQYA of the Income Tax Assessment Act 1936 (ITAA 1936), which are attributable to dividends from shares acquired by the trust post 31 December 1997 and distributed from that trust?

No, the trustee of the superannuation fund is not entitled to the benefit of franking rebate, under section 160AQYA of the ITAA 1936 which are attributable to dividends from shares acquired by the unit trust post 31 December 1997 and distributed from that trust.

The Superannuation Fund is a complying superannuation fund with only two members, husband and wife.

The Superannuation Fund owns (and has always owned) 100% of the issued units in the Unit Trust.

The Unit Trust has not made a family trust election.

The Superannuation Fund does not have a vested and indefeasible interest in the corpus of the Unit Trust.

The trustee of the Unit Trust is a qualified person in relation to the dividends.

There is no related payment in respect of the dividends.

Section 160AQYA of the ITAA 1936, sets out when the trustee of a superannuation fund is entitled to a franking rebate. To be entitled to the franking rebate, the trustee of the superannuation fund must be a qualified person in relation to the relevant franked dividend for the purposes of Division 1A of Part IIIAA of the ITAA 1936.

Under Division 1A of Part IIIAA of the ITAA 1936, where a taxpayer derives dividends through a distribution from a trust consisting wholly or in part of dividends, the taxpayer needs to determine what component of the trust distribution is attributable to a particular dividend, and then determine whether, in relation to that dividend, the taxpayer is a qualified person.

Under section 160APHD of the ITAA 1936, a " qualified person ", in relation to a dividend paid on shares, has the meaning given by section 160APHO, as that meaning is affected by section 160APHU.

Under section 160APHU of the ITAA 1936, if a trustee is not a qualified person in relation to a dividend then no beneficiary of the trust is a qualified person in relation to the dividend.

Under section 160APHO of the ITAA 1936, a taxpayer who holds shares or an interest in shares on which a dividend or distribution has been paid is a qualified person in relation to the dividend if the taxpayer has held the shares or interest in shares at-risk, not counting the day of acquisition or disposal, for at least 45 days (or 90 days for certain preference shares).

Under subsection 160APHO(3) of the ITAA 1936, when calculating the days for which the taxpayer continuously held the shares or interest, any days on which the taxpayer has materially diminished risks of loss or opportunities for gain in respect of the shares or interest are to be excluded, but the exclusion of those days is not taken to break the continuity of the period for which the taxpayer held the shares or interest.

Subsection 160APHM(2) of the ITAA 1936 states 'A taxpayer is taken to have 'materially diminished' risks of loss or opportunities for gain on a particular day in respect of shares held by the taxpayer, or in respect of an interest held by the taxpayer in shares, if the taxpayer's net position on that day in relation to the shares or interest has less than 30% of those risks and opportunities.'

Section 160APHL of the ITAA 1936, determines how beneficiaries under a trust calculate the extent of their interests in shares acquired after 3.00 pm by legal time in the Australian Capital Territory on 31 December 1997.

Subsection 160APHL(5) of the ITAA 1936, provides the calculation for determining the beneficiary's interest in the relevant share and subsection 160APHL(7) of the ITAA 1936 deems this a long position (section 160APHJ(4) of the ITAA 1936).

If the trust is not a widely held trust, a family trust, deceased estate or employee share scheme, subsection 160APHL(10) of the ITAA 1936, will give rise to a short position (section 160APHJ(3) of the ITAA 1936) equal to the long position that arose under subsection 160APHL(7) of the ITAA 1936, which in effect cancels out this long position. Furthermore, where the beneficiary's interest in the trust holding is a fixed interest it would give rise to a corresponding long position.

Under Subsection 160APHL(11) of the ITAA 1936, the beneficiary's interest in the trust holding is a fixed interest to the extent that it is a vested and indefeasible interest in the corpus of the trust.

The Superannuation Fund's interest in the corpus of the Unit Trust is not a fixed interest, as the Superannuation Fund does not have a vested and indefeasible interest in the corpus of the Unit Trust.

Therefore, the trustee of the Superannuation Fund has a nil net position and the interest is not held at-risk. The trustee of the Superannuation Fund will not be a qualified person for the purposes of Division 1A of Part IIIAA of the ITAA 1936. Consequently, the trustee of the superannuation fund will be denied entitlement to the benefit of a franking rebate on a distribution from the Unit Trust.