The High Court has in FCT v Thomas & Ors unanimously upheld the Commissioner’s appeal against a Full Federal Court decision, effectively confirming trustees are unable to ‘split’ franking credits from the associated dividend income.


Based on powers within the relevant trust deed, the trustee of the Thomas Investment Trust had made two resolutions, the first dealing with the net income of the trust, and another separately dealing with the franking credits.

The trustee’s resolutions were intended to maximise refundable tax offsets and distribute (or stream) the income so as to attract the most favourable tax outcome.

After the Australian Taxation Office (ATO) gave notice of an audit, the trustee successfully applied for a declaration from the Supreme Court of Queensland that the trust resolutions were effective (i.e., in separately distributing the relevant franking credits).

A single judge of the Federal Court held the Supreme Court’s declaration was not binding on the Commissioner.

However, on appeal, the Full Federal Court reversed the Federal Court’s decision, holding the Supreme Court’s interpretation of the trust deed and trustee resolutions was binding on the ATO.

At the High Court, the taxpayers continued to argue the ATO was bound by the Supreme Court’s declaration, despite accepting the resolutions were ineffective for the purposes of Division 207 of the ITAA 1997.


The High Court upheld the Commissioner’s appeal, accepting that the Full Court of the Federal Court was in error in concluding the “directions” given by the Supreme Court of Queensland determined conclusively, against the Commissioner, the application of Division 207 to those franked distributions.

The High Court did not accept the taxpayers’ contention that an alternative construction of the two trust resolutions was effective for the purposes of splitting the franking credits from the franked dividends to which they were attached.

The High Court found that not only did this alternative construction not work factually, it was legally ineffective for the purposes of Division 207 and should be rejected.

Tax practitioners should now be clear that franking credits need to ‘follow’ the franked dividends to which they are attached, and cannot be dealt with separately to those dividends for income tax purposes.


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