How to stream trust income sounds confusing enough in theory but gets even more confusing when you drown in numbers. So here is a simple streaming trust income example.
Streaming Trust Income Example
Quick comment on the side. s95 net income and Division 6 income are the same. Two different words for the same thing. s95 is in Division 6. When talking about streaming, it is common to distinguish between Division 6 income and Division 6E income.
The trustee of the Smith Family Trust wants to distribute income among five beneficiaries A, B, C, D and E as follows:
Specific entitlement to B for partly franked dividend $14m franking $6m
Specific entitlement to C for capital gain $10m
A, B, D and E get the rest of the income in equal shares.
Partly franked dividend $10m with franking credits of $4m
Business profit D $6m
Conditions to Stream
To stream income you need to meet the five conditions listed in Subdiv 115-C and 207-B.
Condition # 1: Is there a capital gain or franked distribution? There is both a capital gain and a franked distribution.
Condition # 2: Does trust income include the income you want to stream? Let’s assume that the deed includes a s95 clause so the trust income includes the capital gain and franking credits.
Condition # 3: Does the trust deed empower the trustee to stream? Let’s assume that the trust deed empowers the trustee to separately account for distinct classes of income or capital and to make any beneficiary specifically entitled to a class of income.
Condition # 4: Did the trustee make a beneficiary specifically entitled? Bob and Charlie are specifically entitled to certain income.
Condition # 5: Did the trustee record the specific entitlement with the set time frame? Let’s assume that the trustee recorded all income and the resolutions regarding its distribution before year end. So all formalities are taken care of.
Now you need to determine what s95 net income you need to allocate and who includes what in their assessable income.
Step 1 – Determine Trust Income
Trust income is $40m.
Step 2 – Determine Net Income
Net income is $50m and it is what this is all about. The whole exercise is about who will include what portion of the $50m in their assessable income.
Step 3 – Allocate Specifically Entitled Capital Gains
C is specifically entitled to the capital gain. So includes the capital gain of $10m in his assessable income, assuming that there are no capital losses, discounts or exemptions.
Step 4 – Allocate Specifically Entitled Franked Distributions
B is specifically entitled to the $14m dividend and the $6m franking credit. So B includes the grossed-up value of $20m in his assessable income and then claims the franking credit of $6m.
Step 5 – Determine the adjusted Div 6 Percentage
So you started with $40m of trust income. You have allocated $24m of specific entitlements to trust income. So you are left with $16m.
A, B, D and E are presently entitled to these $16m in equal shares, so each gets 25%. This 25% is the adjusted Div 6 percentage you use to allocate net income re present entitlements.
Step 6 – Determine Net Income Allocated to Beneficiaries
Who includes how much of the trust’s net income in their assessable income?
A: Dividend $2.5m + $1m franking credits + ordinary income $1.5m = $5m
B: Dividend $16.5m + $7m franking credits + ordinary income $1.5m = $25m
C: Capital gain of $10m = $10m
D: Dividend $2.5m + $1m franking credits + ordinary income $1.5m = $5m
E: Dividend $2.5m + $1m franking credits + ordinary income $1.5m = $5m
And voila, you have allocated the entire $50m of net income.
Disclaimer: Tax Talks does not provide financial or tax advice. All information on Tax Talks is of a general nature only and might no longer be up to date or correct. You should seek professional accredited tax and financial advice when considering whether the information is suitable to your or your client’s circumstances.
Last Updated on 30 January 2019