This information is for trustees and beneficiaries of trusts that make capital gains or received franked distributions.
Trust Capital Gains
A recent statement from ATO declares:
If not prevented by the trust deed, you can stream a trust’s capital gains and franked distributions to beneficiaries for tax purposes by making these beneficiaries “specifically entitled” (more below) to the amounts.”
This allows beneficiaries to offset capital gains with their capital losses, apply applicable discounts and, subject to certain integrity rules, get the benefit of any franking credits attached to a franked distribution.
Capital gains and franked distributions to which no beneficiary is specifically entitled are allocated proportionately to a trust’s beneficiaries based on their present entitlements to trust income (which generally is calculated by excluding capital gains and franked distributions to which any entity is specifically entitled). The trustee is taxed in respect of any amounts to which no beneficiary is specifically or presently entitled.
Note that “net income of the trust” is defined in legislation (see Division 6 of Part III of the ITAA 1936). In the context of the taxation of trusts, this is the equivalent legislative term to “taxable income”
When can a trustee stream capital gains or franked distributions?
For tax purposes, a trustee can stream capital gains or franked distributions provided the trustee has the power (either express or implied, see below) under the trust deed.
- An express power to stream may arise where the trust deed empowers the trustee to separately account for distinct classes of income or capital, and where the entitlements of beneficiaries may then relate to those classes.
- A streaming power may be implied if the trust deed empowers the trustee to distribute income or capital at their absolute discretion and there is nothing further in the trust deed, or trust law in the relevant jurisdiction, which limits that power.
Tax assessments when entitled to a capital gain or franked distributions
A beneficiary who is specifically entitled to a capital gain or franked distribution that has been received by a trust is generally assessed for tax on the gain or distribution. They also get the benefit of any franking credits attached to a franked distribution (subject to integrity rules).
A trustee of a resident trust can choose to be specifically entitled to a capital gain of their trust (making such a choice in the trust tax return), in which case the trustee is taken to be specifically entitled to all of the capital gain. This choice can only be made if no part of the capital gain is paid or applied for the benefit of a beneficiary.
Note however that a trustee cannot choose to be specifically entitled to a franked distribution in the same manner.
If not prevented by the trust deed, a trust’s capital gain can be streamed to beneficiaries for tax purposes (even if they don’t have a present entitlement to trust income) by making them specifically entitled to the capital gain. A trustee has until two months after the end of the income year to make a beneficiary specifically entitled to a capital gain (ordinarily, this is August 31).
The trustee of a resident trust may also choose to be assessed on a capital gain if no beneficiary has received or benefited from any amount relating to the gain during, or within two months of the end of, the income year. This allows a trustee to choose to pay tax on behalf of a beneficiary who is unable to immediately benefit from the gain.
Where no beneficiary has a specific entitlement to all or part of a capital gain, and the trustee has not chosen to be assessed on it, the capital gain is allocated to beneficiaries according to their present entitlements to trust income. Any part of a capital gain that isn’t allocated to a beneficiary in this way is allocated to the trustee.
A beneficiary who has a capital gain streamed to them is treated as having an extra capital gain that they will then take into account in working out their own net capital gain for the income year.
Franked distributions of a trust are taxed to the beneficiaries and the trustee in accordance with the rules contained in the relevant legislation (ask us for more). The rules specify how to:
- calculate the portion/share of a franked distribution that the trustee or a particular beneficiary will be assessed on
- allocate the franking credit attached to the distribution.
Note: To avoid double taxation of trust capital gains and franked distributions, there are specific rules that may be required to apply.