The decision in Thomas Nominees Pty Ltd v Thomas & Ors

In this case, franking credits were a benefit that the deed authorised the trustee to distribute as part of the income of the trust. This meant that the resolutions were effective to distribute the franking credits according to the intention of the trustee, and that they were allocated in accordance with the resolutions that specifically address them and not by the other resolution which dealt with other categories of net income.

The Court determined that tax legislation has given franking credits some attributes of income. Franking credits would appear to be an accretion to the trust fund and something of substantial value. Accordingly they confer a financial advantage which falls to be dealt with by the trustee.
Commissioner’s views (in TR 2012/D1)

Division 6 of the Income Tax Assessment Act 1936 (ITAA 1936) contains rules of assessing the net income of a trust calculated under s 95 of the ITAA 1936. Division 6E adjusts the rules in Division 6 to ensure that capital gains and franked distributions are not taxed twice. Accordingly, Division 6E applies to Division 6 on the assumption that the net capital gains and franked distributions are excluded from the trust’s net income, and any amount relating to these items is excluded from the income of the trust estate.

The meaning of “income of the trust estate” will primarily depend on the terms of that trust and the general law of trusts. In the context of Division 6, income must be:

• Measured in respect of distinct years of income
• A product of the trust estate; and
• An amount in respect of which a beneficiary can be made presently entitled (i.e. ‘distributable income’)

Consequently, for the purpose of Division 6, the “income of the trust estate” must be represented by a net accretion to the trust estate for the relevant period. The income a trust estate for an income year cannot be more than the sum of:

• Accretions to the trust estate
• Less any accretions to the trust estate for that year which have not been allocated to income;
• Less any depletion to the trust estate for that year which have been allocated as being chargeable against income.

That is, the reference to “income of the trust estate’ in Division 6 should properly be taken to be references to the income legally available for distribution to beneficiaries in accordance with section 97 (i.e. ‘distributable income’).

Where the distributable income of the trusts is equated with the trust’s net income, amounts received that would not ordinarily be considered income but which are assessable, will form part of the trust’s income. Furthermore, amounts received that might ordinarily be considered income but which are not assessable or, outgoings that are not deductible, will be treated for the trust purposes as accretions to or depletions of trust capital.

Notional income amounts cannot be taken into account in calculating the income of the trust estate for Division 6 purposes. The exception to this is where the trust’s distributable income is equated with its net income. In such a case, the notional income amounts may form part of the distributable income of the trust, but only to the extent that they are matched by notional expense amounts.

The amount of a franking credit may be included in the calculation of the trust’s net income under subsection 207-35(1) of the ITAA 1997, but does not form part of the distributable income of the trust estate.