Franking of Dividends: holding period and related payments - unit trust - qualified person

Is a unitholder in a unit trust whose trust deed permits the issue of new units at the trustee's discretion and at a price determined by the trustee, a qualified person for the purposes of paragraph 207-150(1)(a) of the Income Tax Assessment Act 1997 (ITAA 1997) in relation to dividends that flow indirectly where the trustee has held the shares at risk for more than 45 days in the absence of a family trust election?

No. The unit holder will not be taken to have held their interest in the shares at risk.

A non-widely held unit trust has two existing unit holders. Both unitholders have held their units since the start of the relevant income year. Under the trust deed the trustee can determine the issue of new units and the price at which the units are to issue.

The trustee acquired shares during the income year and has held those shares at risk for more than 45 days. A distribution attributable to franked dividend income was distributed to the two unit holders in the income year. Neither the trustee nor the beneficiary has any other positions in respect of the shares or the interest in the shares. Neither the trustee nor the beneficiary nor any associate of the trustee or of the beneficiary has made, is under an obligation to make, or is likely to make, a related payment in respect of the dividend.

Relevantly, paragraph 207-150(1)(a) of the ITAA 1997 denies a tax offset if the entity to whom a franked distribution flows indirectly is not a qualified person in relation to the distribution for the purposes of Division 1A of Part IIIAA of the Income Tax Assessment Act 1936 (ITAA 1936) (as in force on 30 June 2002).

The beneficiaries of a trust, including beneficiaries of a unit trust, are taken under subsection 160APHG(3) of the ITAA 1936 to acquire, hold or dispose of a interest in shares when the trustee acquires, holds or disposes of those shares. The unitholders are taken to hold an interest in the shares.

Section 160APHL of the ITAA 1936 will apply as the shares were acquired after 31 December 1997. Subsection 160APHL(7) of the ITAA 1936 attributes a delta of +1 to the interest in the shares held by a beneficiary of a non-widely held trust as determined under subsection 160APHL(5) of the ITAA 1936.

Unless there is a family trust election in place (or exceptions relating to deceased estates or employee share schemes are satisfied), subsection 160APHL(10) of the ITAA 1936 attributes additional positions to the beneficiary. It gives rise to a short position equal to the beneficiary's long position determined under subsection 160APHL(7) of the ITAA 1936 and a long position equal to so much of the taxpayer's interest in the trust holding as is a fixed interest. For the purposes of subsection 160APHL(10), the beneficiary's interest in the trust holding will be taken to be a fixed interest to the extent that the interest represents a vested and indefeasible interest in so much of the corpus of the trust as is comprised by the trust holding.

In this case, the unitholder will have a long position with a delta of +1 under subsection 160APHL(7) of the ITAA 1936 and a short position with a delta of -1 under subsection 160APHL(10) of the ITAA 1936. In the absence of any other long positions, this will leave the unit holder with a net position of zero and a materially diminished risk of loss or opportunity for gain in accordance with subsection 160APHM(2) of the ITAA 1936. However, a long position will arise in respect of the unit holder's interest in the trust holding as is a fixed interest to the extent that the interest is constituted by an indefeasible vested interest in so much of the corpus of the trust as is comprised by the trust holding.

In the present circumstances where the trustee may at its discretion issue further units at a price determined by the trustee, the interest will under subsection 160APHL(12) of the ITAA 1936 be taken to be defeasible if the issue of new units has the effect of materially reducing the value of the relevant interest. However, where the issue is conducted in accordance with subsection 160APHL(13) of the ITAA 1936, no material reduction in the value of the interest will be taken to have occurred and the interest will not be taken to be defeasible. However, as the trustee is at liberty to determine the issue price of any new units that may be issued, subsection 160APHL(13) will not apply should the trustee determine the issue price of the units in contravention of the requirements of subsection 160APHL(13). Consequently, the unit holder will have no additional long position and therefore will not be a qualified person in relation to the dividend paid on the shares.