A franked dividend received through a trust can carry valuable tax credits. However, those credits do not automatically become available merely because the trustee distributes the dividend or records a beneficiary as specifically entitled.

Why the holding period rule matters

Australia’s imputation system is intended to prevent company profits from being taxed twice. Where an Australian company pays a franked dividend, the shareholder may receive a tax offset reflecting tax already paid by the company.

When shares are held by a trustee, the franked distribution and associated credit may flow through to a beneficiary under the trust streaming rules. But allocation is only the first step. The recipient must also satisfy the imputation integrity rules, including the holding period rule.

For ordinary shares, the relevant interest generally needs to be held “at risk” for at least 45 qualifying days. The acquisition and disposal days are excluded. Days may also be disregarded where options, hedges, indemnities or other arrangements materially reduce exposure to movements in the share value. Preference shares are generally subject to a 90-day requirement.

Two levels of qualification

For a non-widely held trust, advisers should generally examine qualification at two levels.

A trustee-level failure cannot usually be repaired by appointing the dividend to another beneficiary. Likewise, a valid trustee holding does not automatically qualify every beneficiary.

Family trust elections are important, but limited

A family trust election can be critical for a discretionary trust. Without an election, the special trust rules may attribute an offsetting position to a discretionary beneficiary, preventing the beneficiary from being sufficiently exposed to the underlying shares.

However, an election is not a universal exemption. It does not cure a trustee’s failure to hold shares at risk, override the related payments rule, validate an ineffective trustee resolution, or cause a newly created beneficiary to have existed earlier.

It can also create an ongoing family-group framework. Distributions outside that group may attract family trust distribution tax, so the election should not be made solely as a last-minute response to a franking-credit issue.

Why bucket companies need early planning

Bucket companies require particular care where a trust receives material franked dividends. A newly incorporated company cannot hold a deemed beneficiary interest before it legally exists. Incorporating a company shortly before 30 June may therefore be too late, even where the trustee has held the shares for many years.

The relevant dates are tied to the dividend’s ex-dividend date and statutory qualification period, not simply the end of the financial year. A family trust election or interposed entity election may address family-group treatment, but neither can create a pre-incorporation holding period.

What trustees and advisers should review

The holding period analysis should be completed before the trustee resolves to stream material franked income. A practical review should include the following steps.

1. Identify the share parcel. Confirm which acquisition produced the dividend and whether later purchases or sales affect parcel identification.
2. Calculate qualifying days. Use the correct ex-dividend date and exclude acquisition, disposal and materially hedged days.
3. Review economic exposure. Check options, forward sales, indemnities, securities lending and arrangements to pass the dividend benefit onward.
4. Test the beneficiary. Confirm when the beneficiary came into existence, entered the beneficiary class and acquired the relevant deemed interest.
5. Check elections and family-group status. Review any family trust election and interposed entity election, including their effective dates.
6. Confirm streaming requirements. Ensure the deed permits streaming and the beneficiary is validly made specifically entitled where intended.
7. Review connected integrity issues. Consider family trust distribution tax, Division 7A, section 100A and wider imputation anti-avoidance rules where relevant.

What this means for you

Franking-credit planning through trusts should not be left until the distribution resolution is prepared. Once a qualification period has expired, a trustee cannot recreate the missing economic exposure through retrospective drafting.

Early review is particularly important where the trust has acquired or sold shares during the year, uses derivatives, has no family trust election, proposes to add a new beneficiary, or intends to distribute franked income to a bucket company.