A Matter of Trusts

Taxation in Australia Journal

Beneficiaries of a unit trust may only claim franking credits if they are a “qualified person” in relation to the franked dividend. In order to be a qualified person the taxpayer must satisfy both the related payments rule and the holding period rule. Whilst the former can be easily satisfied, the latter creates significant issues for beneficiaries of a unit trust. The holding period rule requires a beneficiary to have held their interest in the shares at risk for a continuous period of not less than 45 days.

The Commissioner of Federal Taxation considers that a beneficiary’s interest in the corpus of a unit trust cannot be fixed. A beneficiary who has no fixed interest will have a net position of zero and materially diminished risks of loss and opportunities for gain for the entire test period, and therefore cannot satisfy the holding period rule.

This article explores this franking credit trap faced by beneficiaries of unit trusts and considers how those beneficiaries can gain access to franking credits on franked dividends.

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