Income: Trustee of a Trust with a Non-Resident Beneficiary (Franked Dividends and Imputation Credits)

Whether the taxpayer, a trustee of a trust who is liable to be assessed for tax in respect of a non-resident beneficiary under section 98 of the Income Tax Assessment Act 1936 (ITAA 1936), should include in their assessable income amounts distributed to a non-resident beneficiary as franked dividends and imputation credits.

No, the amount distributed to the non-resident beneficiary as franked dividends, which are exempt from withholding tax, is excluded from the assessable income of the trustee under section 128D of the ITAA 1936.

Section 160ARB of the ITAA 1936 provides a deduction that operates to remove the effect of the grossing-up of the dividends by the imputation credits.

The taxpayer, a trustee of a trust, distributes an amount of income, which includes franked dividends and imputation credits, to a non-resident beneficiary of the trust. No withholding tax is payable on the distribution.

The trustee is liable for tax in respect of the non-resident beneficiary.

Section 128D of the ITAA 1936 excludes from assessable income, certain income that is exempt from withholding tax including franked dividends. The amount distributed to the non-resident beneficiary as franked dividends is excluded from the assessable income of the trustee under section 128D of the ITAA 1936.

The assessable income is reduced by the amount of imputation credits distributed to the non-resident beneficiary, as section 160ARB of the ITAA 1936 provides for a deduction limited to the lesser of: (i) the 'trust amount' (the share of the net income of the trust on which the trustee is liable to be assessed under section 98 of the ITAA 1936); and (ii) the 'potential rebate amount' in relation to the 'trust amount' if section 128D of the ITAA 1936 did not apply. The 'potential rebate amount' for the trustee (calculated using the formula in section 160APA of the ITAA 1936) equals the amount of imputation credits included in the assessable income of the trust estate.

In the trustee's case, the 'potential rebate amount' is less than the 'trust amount', and a deduction is available to the trustee under section 160ARB of the ITAA 1936 for the amount of the imputation credits included in assessable income.