Monday, November 22, 2010

Streaming decision released

There was confirmation last week from the Queensland Supreme Court that where a trust deed of a discretionary trust has appropriate powers and the trustee resolutions are appropriately crafted, a trustee can allocate franking credits differentially from net income.
For those interested the full title of the case is 'Thomas Nominees Pty Ltd ACN 010 049 788 v Thomas & Anor [2010] QSC 417' (Supreme Court of Qld, Applegarth J, 11 November 2010).
The decision turned to a large extent on the terms of the trust deed and the fact that the trustee:
(a) could treat franking credits as income of the trust capable of distribution;
(b) had discretion to distribute franking credits to different beneficiaries; and
(c) had the power to stream different categories of income between beneficiaries.
In light of the above powers, in brief terms, the key aspects of the decision were as follows:
1. selective allocation of franking credits is possible under section 207-35 ITAA 1997;
2. section 97 ITAA 1936 takes a proportionate approach to the distribution of net income (as set out in the Bamford decision);
3. section 207-35 is an exception to Division 6 (and therefore section 97) ITAA 1936;
4. franking credits need not follow the shares of net income included in a beneficiary's assessable income on an equal footing;
5. net income (under section 95 ITAA 1936) does not need to exceed the franking credits included in assessable income for those credits to pass through to beneficiaries; and
6. the ATO's comments that franking credits may not be able to form part of the income of a trust estate for trust law purposes because they are 'merely a tax concept which do not represent an accretion to the trust fund over and above the distributions to which they attach' could not be accepted;
7. ultimately, franking credits were held to have some attributes of income under the tax legislation, therefore they could be dealt with by the trustee.
Until next week.