Franked dividends distributed to new corporate beneficiary - risk of losing the franking offset
Franked dividends distributed to new corporate beneficiary - risk of losing the franking offset
Short on time? Read the key takeaways.
Recent Australian Taxation Office (ATO) reviews of private groups have raised questions directed to whether newly incorporated corporate beneficiaries of trusts can claim franking credit offsets on franked dividends distributed through the discretionary trust.
Specifically, the ATO’s appears to have concerns where a discretionary trust or other non-widely held trust receives franked dividends on shares it acquired after 31 December 1997 and the trust distributes the franked dividend to a newly created corporate beneficiary, i.e. incorporated after the date the shares became ex-dividend (which usually will be the day the dividend is declared). The ATO appears to be of the view that the corporate beneficiary is not entitled to the franking offset for the franking credit on the distribution (and the assessable franked dividend is not grossed up by the franking credit). This results in the franked distribution being treated as if it were unfranked, possibly resulting in double taxation.
45-day holding period rule
Under the franking credit trading rules, colloquially known as the 45-day holding period rule, the corporate beneficiary has not and can not have continuously held the shares ‘at risk’ for at least 45 days after the date the shares became ex-dividend because it did not exist during part or all of this period.
Where a valid Family Trust Election (FTE) has been made it usually allows franking credits to flow through the discretionary trust to the beneficiaries. However, it appears the ATO may be contending that this cannot happen where the corporate beneficiary did not exist at the time the trust received the original franked dividends to which the credits attached.
The difficulty facing taxpayers and advisers is that there is no public ATO advice or specific guidance on the ATO website regarding this issue. Except for the targeted questions in reviews of private groups, we are not aware of the ATO making its views on this situation public. All indications are that this is an issue the ATO is closely considering. Yet most taxpayers remain unaware of the ATO’s position, which is only being raised during reviews.
Important for 2025 trust distribution resolutions
Affected trustees and their advisers need to closely consider this issue before finalising the 2025 trust distribution resolutions before 30 June 2025.
Example
Allison is the sole trustee of the Allison Discretionary Trust (ADT). ADT has made a family trust election.
ADT has held 25 per cent of the shares in BCD Services Pty Ltd (BCDS) since the company was incorporated in 2001. BCDS carries on a business providing services to arm’s length customers and is profitable. It has substantial retained profits, and accumulated franking credits. It has previously not paid dividends, having reinvested its past profits in working capital.
In October 2024, after reviewing its financial statements for the year ended 30 June 2024, BCDS decides to pay a maiden dividend of $4 million in total and to fully frank that dividend. It declares that the dividend is to be payable to the holders of shares in the company on 31 October 2024 and that the dividend is to be paid in cash on 1 November 2024.
ADT receives the $1 million cash in its bank account on 1 November. In March 2025, Allison’s accountant speaks to her about tax planning for the 2024/25 financial year. The maiden dividend from BCD is a key topic of conversation. Having taken legal, tax and financial planning advice, Allison determines that she would like to establish a corporate beneficiary of ADT to receive the franked dividend distribution. She intends that the cash from the distribution will be invested by the corporate beneficiary in various income-producing investments on its own account.
Allison incorporates Mouse Pty Ltd (MPL) to be that corporate beneficiary on 15 April 2025. On 30 June 2025, Allison in her capacity as trustee of ADT, makes MPL presently entitled to all of the income of the trust for the 2024/25 year and pays that amount to MPL.
Ordinarily, it would be expected MPL would be assessed on the $1 million franked distribution and the associated franking credits. Assuming both MPL and BCD had the same corporate tax rate, no further tax would be payable by MPL. However, where the ATO considers that the 45-day holding period rule has not been satisfied, MPL is likely to be assessed on the $1 million distribution, not grossed up to include the franking credits but without the benefit of the franking credits tax offset, effectively resulting in double tax being paid.
Recommended action for affected taxpayers
Although the ATO has not provided specific guidance on this matter, as a risk avoidance measure and until the ATO provides clearer guidance, it is recommended that non-widely held trusts consider not distributing franked dividends to newly incorporated companies if the company was incorporated after the day on which the underlying shares on which the dividends were paid went ex-dividend. For further information on this topic, please contact your local corporate and international tax specialist.
The information contained in this publication is purely factual in nature and does not take into account your personal objectives, financial situation or needs. It is provided as an information service only and does not constitute financial product or other professional advice and should not be relied upon as such. Before making any investment or financial decisions you should consider your particular objectives, and financial circumstance or needs. Where information relates to a particular financial product you should obtain and consider the relevant Product Disclosure Statement and obtain advice from a financial adviser before making any decision. If you do require financial advice, please contact the relevant BDO member firms in Australia who will be able to assist you in their capacity as an Australian Financial Services licensee. BDO Australia Ltd and each BDO member firm in Australia, their partners and/or directors, employees and agents do not give any warranty as to the accuracy, reliability or completeness of information contained in this publication nor do they accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it, except in so far as any liability under statute cannot be excluded.
BDO refers to one or more members of a national association of separate entities who are all members of BDO Australia Limited, an Australian company limited by Guarantee. BDO Australia Ltd and its members are independent member firms of BDO International Ltd, a UK company limited by guarantee. Each BDO member firm in Australia is a separate legal entity and has no liability for another entity’s acts and omissions. Liability limited by a scheme approved under Professional Standards Legislation.
BDO is the brand name for the BDO network and for each of the BDO member firms.
© 2025 BDO Australia Ltd. All rights reserved.