TRUST STREAMING 2011
Prepared & presented by:
Ken Schurgott
Director - Solicitor
Schurgott Noolan Pty Ltd
(an incorporated legal practice)
Suite 4, Level 3, 39 Martin Place
Sydney NSW 2000
National Event
Sydney
16 June 2011
© Ken Schurgott 2011
Disclaimer: The material and opinions in this paper are those of the author and not those of The Tax Institute. The Tax Institute did
not review the contents of this paper and does not have any view as to its accuracy. The material and opinions in the paper should
not be used or treated as professional advice and readers should rely on their own enquiries in making any decisions concerning
their own interests.
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INTRODUCTION
This paper is about the new streaming provisions set out in the Tax Laws Amendment (2011 Measures
No. 5) Bill 2011 and explained in the accompanying Explanatory Memorandum.
These measures were introduced into Parliament on Thursday 2 June 2011 and if passed by the
Parliament, will have effect from 1 July 2010. Trust distributions to be made by 30 June 2011 must take
these new rules into account if the trust has derived taxable capital gains or franked distributions.
Taxable capital gains and franked distributions for 2011 and beyond are dealt with exclusively under the
new streaming provisions.
The Explanatory Memorandum makes it clear in Chapter 2 that the streaming provisions have been
introduced as an interim measure to deal with perceived anomalies in the taxation of capital gains and
franked distributions pending a comprehensive review of Division 6 of the 1936 Act. It is understood that
that review will commence in the new financial year.
These amendments to the law have been introduced with haste in view of the impending year end. The
Assistant Treasurer in his Second Reading Speech observed that:
“The government is aware that due to the short timeframe involved in developing these
amendments, there may be scope for unintended consequences. The operation of these
amendments will therefore be closely monitored and if unintended consequences are identified,
the government will act to remedy these consequences retrospectively where appropriate.”
The problem with this undertaking is that practitioners advising trustees may, in view of the brief time they
have to come to grips with these measures, give advice quite inconsistent with the policy intention
underlying the amendments. The error will not be an unintended consequence, in fact, quite the opposite.
As Mr Shorten further observed in his Second Reading speech:
“If the amendments in Schedule 2 are not enacted by 30 June 2011, trustees of approximately
660,000 trusts in Australia that are required to make their resolutions by 30 June 2011 will face
significant uncertainty.”
Whether legislation is passed or not significant uncertainty will be experienced.
In his document “Improving the taxation of trust income” dated 2 June 2011 the Commissioner notes that
resolutions made prior to year ended 30 June 2011 cannot be amended to take account of the law as
finally enacted and:



if the existing law is applied and the law is enacted with retrospective effect no shortfall penalty
will be applied and interest will be remitted in full if an appropriate amendment is sought within a
reasonable time;
if the new law is applied but it is not enacted as introduced and the taxpayer lodges a return
based on the anticipated changes then if there is an increase in the tax liability because of
amendments to the Bill during the Parliamentary process no shortfall penalty will apply and
interest will be remitted to the base rate up to the date of enactment and thereafter if an
appropriate amendment is sought;
if the new law is not enacted but a return is lodged based on the anticipated changes no shortfall
penalties will be applied and interest will be remitted to the base rate.
What the Commissioner has failed to address is the trustee and advisers’ inability to understand the law
as enacted, whether before or after 30 June and simply failing to get it right.
It is the writer’s view that the Commissioner should maintain Taxation TR 92/13 through to at least 1 July
20111 and provide an urgent formal position statement (whether in a Practice Statement, a Taxpayer Alert
1
However, the Commissioner has threatened to withdraw the ruling notwithstanding the fact that 14 days remain to June 30.
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or one of his many formal documents) that he will take no audit action unless there is clear and material
abuse.
General Law Streaming
2
th
In his paper delivered on 19 May 2011 to the NSW Division’s 4 Annual Tax Forum Michael Binetter
puts forward a forceful argument that general law streaming remains available. He draws this conclusion
in the face of the ATO’s Decision Impact Statement on Bamford and the expression in the Exposure Draft
Explanatory Memorandum that “without the operation of specific provisions to attribute character to a
beneficiary’s share of the trust’s taxable income, appointing or streaming trust income of a particular
character to specific beneficiaries is not effective for tax purposes” (paragraph 1.10).
The question remains whether the proposed legislation, if introduced, will be an exclusive code for
streaming capital gains and franked distributions. The answer is very likely to be yes, but where that sits
with the continued protection of the binding ruling is very unclear.
Overview of Flow Through
As the Treasury Discussion paper foreshadowed the model adopted in the Bill is really a detour model in
that the franked distributions and taxable capital gains are directed around Division 6 and assessed in the
hands of the beneficiary that is specifically entitled to the franked distribution or capital gain by application
of Subdivision 207-B in the case of a franked distribution and Subdivision 115-C for a capital gain. In so
doing, however, capital gains must pass through the method statement in subsection 102-5(1). This is the
gross up and discount/reduction model and, in the writer’s view, introduces confusion.
A new Division 6E then prevents double taxation by adjusting the Division 6 income and net income of
the trust to take out the amounts to which the beneficiary has been made specifically entitled. The
amendments appear to be very complicated in their expression but in practice they may not be so difficult
to apply (when short cuts have been established).
The detour model has been chosen because it seemingly avoids the complications of adjusting for the
various forms of trust income before reaching the beneficiary. Division 6E will reduce the income by the
amount of income referable to the streamed capital gain or franked distribution when some relevant
amount has been included in the trust income. For example, if the trust deed does not include capital
gains as income there is no Division 6E adjustment for a specifically entitled capital gain.
The critical aspect of the legislation is that lying behind the concepts of a specific entitlement. The policy
which has emerged very late in the day is that in order for a beneficiary to be specifically entitled, the
beneficiary must receive the benefit of the entire franked distribution or capital gain (after directly relevant
expenses and capital losses).
Diagrammatically the exercise looks like this when there is only a capital gain:
2
M. Binetter; “Some Issues Post Bamford”.
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Part not
specifically
entitled
adjusted
Div. 6%
method
statement
capital gain
of trust
Beneficiary’s
taxable
capital gain
in sec 102-5
Part
specifically
entitled
income of
trust
present
entitlement
Division 6E
adjustment
reduction of
present
entitlement
reduced
taxable
amount
It should be noted that all capital gains pass through subdivision 115-C not just those to which a
beneficiary is specifically entitled. There will always be an application of Division 6E when a trust makes a
capital gain whether specifically allocated or not.
The application of the proposed measures to franked distributions can be represented diagrammatically
as follows:
Franked
distributions
specific allocation
A
specific entitlement
+ franking credit
A’s assessable income
non-specific allocation
A
+ franking credit
Adjusted Div. 6%
B
Income of
Trust
+ franking credit
Present
entitlement
Division 6E
adjustment
Reduced
present
entitlement
B’s assessable
income
Reduced
taxable
amounts
All franked distributions pass through Subdivision 207-B not just those to which a beneficiary is
specifically entitled. There will always be an application of Division 6E when a trust has franked
distributions whether specifically allocated or not.
As will be seen there are a number of issues which emerge that complicate this proposed legislation over
and beyond the rather simple approach adopted prior to the Commissioner’s stance on streaming.
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The things which complicate matters are:
1) there can be different outcomes according to the definition of income adopted by the Trust Deed;
2) significantly different outcomes can result where a beneficiary has not been made specifically
entitled to the franked distribution or capital gain. This is most pronounced in relation to capital
gains;
3) the concept of making a beneficiary entitled to the entire financial benefit from a capital gain or
franked distribution is fraught with difficulty particularly where there are capital losses or directly
related expenses;
4) the way in which capital losses and directly related expenses are to be dealt with is confusing.
The following discussion related to these measures proceeds by way of identifying an issue or question
and then proceeding to address it and provide an example of the issue.
Question (1)
Why stream capital gains and franked distributions?
Example (1) – Capital losses
For capital gains a beneficiary of a trust may have capital losses and those capital losses may best be
use against capital gains streamed from the trust to the beneficiary.
Miss A has capital losses of $50,000 from mining shares she sold at a loss. Miss A’s family’s
discretionary trust controlled by her mother has made a non-discount capital gain of $100,000 on sale of
listed shares. The trustee can use the streaming rules in the Bill to direct the taxable gain to Miss A so
that she can use her capital losses.
Alternatively, the trustee may make Miss A specifically entitled to 50% of the capital gain precisely
matching her capital loss. The balance of the capital gain will be attributed in proportion to the present
entitlements to income (other than the capital gain already specifically allocated – the adjusted Division 6
percentage).
Example (2) – General discount
In order to achieve the 50% CGT general discount a capital gain made by a trust must be allocated to an
individual and not a company.
The B Family Trust has net rents of $100,000 and a discount capital gain of $50,000 (pre-discount of
$100,000). The Trustee wishes to allocate the net rental income to a company to enjoy the 30%
corporate tax rate.
The discount capital gain is to be allocated to Mr B to ensure that the 50% CGT discount is maintained.
The streaming rules allow this allocation if properly implemented.
Example (3) – Franked distributions
It may be desirable to direct a fully franked distribution to a company rather than another trust (perhaps
with losses).
The B Family Trust has net rents of $100,000 and fully franked dividends of $70,000. Trust C has trading
losses of $80,000 and X Co Pty Ltd is available to receive the fully franked dividends.
The Trustee of the B Family Trust may stream fully franked dividends to X Co and direct the balance of
the income to Trust C.
In each of these cases if the streaming is not properly effected part of the franked distribution or capital
gain will be allocated to an undesirable beneficiary.
Question (2)
Can the Small Business concessions be affected?
Are the small business CGT concessions in Division 152 of the 1997 Act affected by the streaming rules?
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The small business CGT concessions may require identification of a significant individual. A significant
individual must have a small business participation percentage of at least 20% (90% when it comes to
indirect interests of a CGT concession stakeholder in an entity). The small business participation
percentage measures interests in capital and income and if they differ the smallest prevails. Streaming
capital gains or franked dividends to a particular individual may affect the small business participation
percentage. This is a consequence of the streaming rules and not an objective. Practitioners need to be
aware of the potential impact of streaming, particularly capital gains on the small business concessions.
Example (4)
The PJ Family Trust has a discount capital gain of $50,000 ($100,000 before discount). It has net rental
income of $40,000. The trustee wishes to distribute half of the rental income to each of A and B and all of
the capital gain to B. In order to make B specifically entitled to the capital gain the trustee must allocate
the income comprising the capital gain ($50,000) to B and also make a capital distribution to B ($50,000).
In this example the definition of income in the Deed includes the taxable part of the capital gain (a tax
equalization deed).
The distributions are:
small business
participation %
$
A
B
capital
-
nil
income
20,000
22.2
capital
50,000
100
income
70,000
77.8
A will not qualify as a significant individual as, if there are different percentages of capital and income, the
smaller percentage is applicable. If it had not been necessary to make the capital distribution in order to
make B specifically entitled to the entire capital gain A would have had a small business participation
interest of 22.22% and qualified as a significant individual. However, the new streaming rules work
against this outcome. If the capital gain is to be streamed B will need to receive the financial benefit of the
capital gain and A receive none of the capital gain.
Would it assist if the definition of income in the Deed were amended to include the entire capital gain as
income. In this case the outcome would be:
small business
participation %
$
A
B
© Ken Schurgott 2011
capital
-
nil
Income
20,000
14.2
capital
-
nil
income
120,000
85.7
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On these facts the capital gain is too significant to allow A to obtain a sufficient interest to be treated as a
significant individual.
The example shows that great care needs to be taken when it is important that the taxpayer is a
significant individual. Streaming a capital gain may be incompatible with achieving that result.
Question (3)
How is a beneficiary made specifically entitled?
The notion of a specific entitlement is at the very core of the streaming provisions and must be
understood before streaming can be put into practice. The concept conceals the difficulties of applying
the provisions on a one-size fits all basis.
The mechanisms for making a particular beneficiary specifically entitled to a capital gain or a franked
distribution are set out in proposed sections 115-228 and 207-58 respectively. These provisions are
almost the same but differ in several very important respects.
(i) Franked distributions:
A beneficiary is specifically entitled to an amount of a *franked distribution made to the trust
equal to the amount calculated under the following formula:
*franked distribution
x
share of net financial benefit
net financial benefit
The “net financial benefit” is an amount equal to the *financial benefit referrable to the *franked
distribution (after any application by the trustee of expenses that are directly relevant to the
franked distribution).
The term “financial benefit” is already found in the 1997 Act in the Dictionary. It means anything
of economic value even if the transaction also imposes an obligation on the entity. Benefits and
obligations are to be looked at separately and not set off against each other. However, it is the
net financial benefit in the formula and not the gross financial benefit.
The numerator in the formula, the “share of the financial benefit” is the amount of the financial
benefit referable to the franked distribution specifically linked to the particular beneficiary. The
share of the net financial benefit is:
“an amount equal to the *financial benefit that, in accordance with the terms of the trust:



the beneficiary has received or can be reasonably expected to receive;
is referable to the *franked distribution (after application by the trustee of any
expenses that are directly relevant to the franked distribution); and
is recorded, in its character as referable to the franked distribution, in the
accounts or records of the trust no later than the end of the income year.”
The highlighted terms are extremely important in practice:
 “in accordance with the terms of the trust” means that the entitlement must be one
consistent with the terms of the Trust Deed. In the context of franked distributions the
Trust Deed must have a clause which allows the trustee to distinguish between
distributions which are franked (whether partially or fully) and those which are
unfranked. The trustee must invoke that clause. How far the trustee must go in
referring to the particular clause in a Deed is considered in a later part of this paper;
 “can be reasonably expected to receive” demonstrates that the financial benefit can be
enjoyed in the future. The creation of a present entitlement by the trustee resolving to
allocate an amount of income comprising franked dividends will be at least a future
financial benefit (this is the point made in paragraph 2.45 of the Explanatory
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Memorandum although it seems to the writer that a present entitlement is a present
financial benefit).
 “after application of any directly relevant expenses of the trustee” stands for the
proposition that if the expenses which are directly relevant to the franked distribution
exceed the amount of the franked distribution the franked distribution cannot be
streamed. This is because there must be a net financial benefit referable to the franked
distribution. If the directly relevant expenses exceed the amount of the franked
distribution there can be no net financial benefit (see paragraph 2.56 of the Explanatory
Memorandum).
 “in its character” means that the trustee must specifically refer to the particular character
of the income or capital item in order to create a specific entitlement. This requirement
is similar to that described above – that the allocation be made “in accordance with the
terms of the trust”. They both look to the need to rely on a particular power in the Deed
to categorize an item, in this present context, as franked (in the context of a capital gain
as a capital gain);
 “recorded in the accounts or records of the trust no later than the end of the income
year”. This requirement is that the trustee records the creation of the specific
entitlement to the franked distribution in the accounts or the records of the trust.
However, it is coupled with the requirement that the allocation be recorded “in its
character”. Trustee resolutions and minutes are records of the trust. Accordingly, it is
sufficient if the resolution of the trustee to appoint / allocate / distribute a fully franked
dividend to a particular beneficiary is made and resolved into writing before 12 midnight
on 30 June.
Example (5)
The PJ Trust has received fully franked dividends of $7,000. It has borrowed $100,000 at 8.5% interest
to fund the acquisition of the shares. The annual interest is $8,500. There is no net financial benefit and
the franked dividends cannot be the subject of streaming. Instead, subject to creating a present
entitlement, they will be proportioned according to the present entitlement of the beneficiaries to income
of the trust – the “Division 6 percentage” of the beneficiaries (or the trustee if there is no beneficiary
presently entitled to a part of the trust income).
The Bill introduces a notion of “pooling” franked distributions so that provided overall there are aggregate
franked distributions exceeding directly related expenses the franked distributions can be streamed.
Example (6)
In addition to the negatively geared shares held by the PJ Trust the trustee has another parcel of shares
which have yielded $10,000 in partially franked dividends (they are franked to 10% only). The trustee
may pool the two dividends and make a particular beneficiary specifically entitled to the net, after directly
related expenses, financial benefit of $8,500 of franked distributions.
This example demonstrates that franking credits play no part in the calculation of the net financial benefit.
Although the franking credit is undoubtedly something of value and thus a financial benefit the financial
benefit is the one referable only to the after directly relevant expenses franked distribution. The expenses
are to be deducted against the franked distribution only, not the franked distribution plus the gross up.
The relevant provision (section 207-59) requires all franked distributions to be treated as a single class in
order to pool (and spread directly relevant expenses). If there is one or more franked distributions
outside the pool then the pooling “concession” cannot be used (see Example 2.18 in the Explanatory
Memorandum).
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Example (7)
The PJ Trust receives a third fully franked dividend of $5,000 and streams that dividend to beneficiary B.
The trustee can stream the second ($10,000) dividend, this third dividend ($5,000) but not the original
dividend of $7,000 (less directly related expenses of $8,500).
Example (8)
The trustee of the PJ Trust resolves in accordance with its power set out in the Trust Deed to appoint all
of its franked distributions to beneficiary A. The Trustee distributes the net rental income to B. The
minutes of the meeting of the trustee are brought into existence on 2 July 2011. The streaming of the
fully franked distributions will be ineffective. They will be apportioned between A and B in accordance
with their Division 6 percentages.
An alternative to recording the financial benefit in the records by way of resolution is to record the
creation of the financial benefit in the accounts. For year end transactions this will be practically
impossible by year end. For an interim distribution this would be possible and practical (although it would
also be recorded in the records by way of a minute of a resolution).
For year end specific entitlements it will be necessary to use the medium of a trustee resolution minuted
before year end.
(ii) Capital Gains:
The formulation in relation to streaming of capital gains is identical to that for franked
distributions with these exceptions:
 the financial benefit must be referable to the *capital gain “after application by the trustee
of any losses, to the extent that the application is consistent with the application of
capital losses against the capital gain in accordance with the method statement in
subsection 102-5(1)”;
 the recording of the financial benefit must be “no later than 2 months after the end of the
income year”.
In relation to the first of these exceptions it should be noted that there is no reference to directly
related expenses. Only capital losses are mentioned. It appears to be assumed that directly
related expenses will have been included in the cost base in determining the capital gain
(although it is noted that paragraph 2.50 of the Explanatory Memorandum refers to “losses or
expenses”).
The reference to making the application of capital losses consistent with the application of
capital losses in the method statement in subsection 102-5(1) appears to impose no constraint.
All it requires is consistency between how the capital losses were applied to determine the
trust’s net capital gain and the amount of capital gain to which the financial benefit (which is to
be allocated) is referable. The method statement provides (in note 1) that “you choose the
order in which you reduce your capital gains”. The Explanatory Memorandum (in paragraph
2.49) supports this view in the observation that “these amendments do not impose any rules on
how trustees can apply losses within the trust generally”. However, the Explanatory
Memorandum goes on to observe that there must be consistency between the way in which the
capital losses are applied for trust accounting purposes and the way in which the tax law capital
losses are applied for the purposes of the method statement. This is a difficult concept and
appears not to be supported by the legislation (perhaps there is an asterisk missing). The
problem here is that the financial benefit is a trust law notion and the *capital gain a tax law
concept. The two concepts are uncomfortable in their relationship. The “requirement” (in
paragraph 2.50 of the Explanatory Memorandum) that trust law capital losses and tax law
capital losses be applied consistently is difficult to fully rationalize.
Example (9)
This example is taken from the Explanatory Memorandum (Example 2.2).
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The trustee sells the following assets:



Asset A – gain $1,000;
Asset B – gain $2,000;
Asset C – loss $500.
In this case the tax and trust basis of income are the same.
The trustee resolves to:


Distribute $500 to Jo referable to the gain on Asset A after being reduced by the capital
loss;
Distribute $2,000 to Tanya as referable to the gain on Asset B.
However, for tax purposes the capital loss on Asset C is treated as applied against the capital gain on
Asset B and not the capital gain on Asset A. As a result the financial benefit that Jo derives is only one
half of the actual financial benefit. As a result she can only treat one half of the capital gain of $1,000 on
Asset A as a specific entitlement (this is what she would have thought she was entitled to in any event).
For trust purposes the capital loss has been applied to Asset A but for tax law purposes it has been
applied to Asset B. The two must be symmetrical. As they are not the losses are not treated as having
been applied against the capital gain. It would be necessary to have appointed the entire net financial
benefit to Jo in order to make her specifically entitled to the capital gain. This was impossible because the
capital losses had for trust law purposes been applied against the capital gain on Asset A.
On the other hand Tanya was allocated the entire capital gain of $2,000 on Asset B. For trust law
purposes this was the entire financial benefit of the capital gain on Asset B because the capital loss was
not applied to the capital gain on Asset B for tax law purposes.
The important message is that the tax law treatment of the capital losses must be identical to the trust law
treatment (and not the other way around, which is suggested by the terms of the definition of “net
financial benefit” in subsection 115-228(1)).
This legislative approach stems from the application of the method statement in subsection 102-5(1).
That method statement is to be applied on an asset by asset basis. Consequently, there is a choice to
apply capital losses against particular assets in applying the method statement. The requirement in the
definitions of “net financial benefit” and “share of net financial benefit” is that the capital losses are applied
for trust law purposes consistently with the way in which they are applied in applying the method
statement.
In some respects it is this requirement that justifies the two month extension provided within which to
create a specific entitlement to a capital gain. It is unlikely that the trustee will have given his or her mind
to such a consideration by 30 June (particularly in the income year ended 30 June 2011).
The second exception is that the trustee has until the end of August after the end of the income year to
record the financial benefit “in its character as referable to the capital gain” in the accounts or records.
This “concession” can be understood where the capital gain is not included in the trust law income. In
such a case the trustee would need to distribute capital of the trust to the particular beneficiary to whom
the trustee wishes to stream the capital gain. The two months would be useful.
However, where the trust law income includes all or part of the capital gain it will be necessary to create
in the beneficiary to whom the capital gain is to be streamed a present entitlement to that income (which
is capital gain). It is difficult to understand what advantage the additional 2 months provides in these
circumstances. It is not a licence to disregard the requirement that a beneficiary must be made presently
entitled to the capital gain included as income prior to year end.
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Question (4)
Trust Streaming 2011
What happens when a beneficiary is not made specifically entitled?
If a beneficiary is not made specifically entitled to a capital gain or a franked distribution the capital gain
or franked distribution is apportioned in accordance with the present entitlement of the beneficiaries to
income (“the Division 6 percentage”) or if there has been capital gains or franked distributions specifically
allocated, the present entitlement to income adjusted for the part of the capital gain or franked distribution
to which beneficiaries have been made specifically entitled (“the adjusted Division 6 percentage”).
Example (10)
The KP Family Trust has derived a discount capital gain of $50,000 ($100,000 before discount). It also
has net rents of $100,000. The Trust Deed provides that income of the Trust is equal to the amount
calculated in accordance with subsection 95(1).
The Trustee appoints income of $50,000 comprising the capital gain to K and the balance of the income
to P. K is specifically entitled to one half only of the capital gain; this is included in K’s assessable income.
The Division 6 percentage is K is:
share of income presently entitled
X 100
total income of trust
=
$50,000
= 33.33%
$150,000
K’s adjusted Division 6 percentage is:
=
$50,000 - $50,000
= 0%
$150,000
P’s Division 6 percentage is:
=
$100,000
= 66.67%
$150,000
P’s adjusted Division 6 percentage is:
=
$100,000
= 100%
$150,000 - $50,000
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As a result P is assessed on one half of the capital gain and all of the rental income. This result is readily
achieved by general reasoning once it is appreciated that there is a part of the capital gain to which no
one is specifically entitled. If the capital gain included in income is ignored, the entire ordinary income of
the trust is enjoyed by P. Accordingly, P is attributed with all of the unallocated portion of the capital gain.
Example (11)
The facts are the same as in Example 4 except that the trustee appoints one half of the balance of the
income to each of K and P.
The Division 6 percentage of K is:
=
$50,000 + $50,000
= 66.67%
$150,000
K’s adjusted Division 6 percentage is:
=
$50,000
= 50%
$150,000 - $50,000
P’s Division 6 percentage is:
=
$50,000
= 66.67%
$150,000
P’s adjusted Division 6 percentage is:
=
$50,000
= 50%
$150,000 - $50,000
In this case K and P include one half each of the capital gain to which no beneficiary has become
specifically entitled. This is an easy result to arrive at without resorting to the arithmetic. Once that part of
the capital gain to which K was specifically entitled is ignored K and P have an equal share of the income
other than the capital gain and as a result they share the unallocated capital gain equally.
Example (12)
Again in this Example the Trust has made a $50,000 discount capital gain ($100,000 before discount)
and $100,000 net rent. However, the Trust Deed provides that capital gains are not included in income.
The Trustee intends to make K specifically entitled to the capital gain but fails to do so because the
resolution is made on 1 September 2011. P is entitled to all of the income of the trust.
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K’s Division 6 percentage is:
=
nil
= nil
$100,000
K’s adjusted Division 6 percentage is:
=
nil
= nil
$100,000
P’s Division 6 percentage is:
=
$100,000
= 100%
$100,000
P’s adjusted Division 6 percentage is:
=
$100,000
= 100%
$100,000
The entire amount of the discount capital gain is assessed to P. If P is a company the capital gain will be
undiscounted.
It should be noted that there is no adjustment required to the denominator for the adjusted Division 6
percentage formula because no amount of the capital gain was included in the income of the Trust.
Question (5)
When do trust resolutions need to be made?
See the last three paragraphs of the response to Question (3).
Question (6)
How should trust resolutions be drawn?
The essence is that in order for the beneficiary to be specifically entitled to a capital gain or a franked
distribution the beneficiary must:


be reasonably expected to receive the financial benefit referrable to the capital gain (after
application of directly relevant expenses or capital losses);
the financial benefit must be recorded in its character as referable to the capital gain or franked
distribution.
It could be expected that a resolution of the trustee effecting a specific entitlement would:


identify the nature of the distribution ie whether capital or income;
refer to the specific capital gain or franked distribution (or where franked distributions are pooled,
the pool of franked distributions);
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use words which connect the distribution with the capital gain or franked distribution;
A “balance” distribution will not make the beneficiary specifically entitled to anything (this is specifically
mentioned at paragraph 2.65 of the Explanatory Memorandum).
The Explanatory Memorandum (at paragraph 2.64) provides some examples of trustee resolutions which
will do the job:
 “under the trust deed, a beneficiary is entitled to all of the capital gains of the trust”;
 “the trustee resolves to distribute all of the dividends of the trust to a beneficiary”;
 “under a trust deed that includes capital gains as income (either by default or because the trustee
exercises a power to re-characterise the amount as income), a beneficiary is entitled to all of the
profits made on or derived from an asset”;
 “under a trust deed that does not include capital gains as income, the trustee resolves to advance
capital representing profits from the sale of a property equally to the beneficiaries”.
These examples are deceptively simple. However, they do highlight the most important aspect of these
new rules before allocating a capital gain (or with less concern, a franked distribution) that it is necessary
to determine how the capital gain is characterized in the Trust Deed.
There are four commonplace treatments of capital gains:

the Trust Deed adopts ordinary income principles3 - the capital gain is not included as income
and must be distributed to the beneficiary as a capital distribution (whether as a partial vesting or
an advance of capital according to the terms of the particular Trust Deed);
Example (13)
The Trust Deed for the QT Family Trust is silent as to what comprises income of the Trust. The Trustee
makes a discount capital gain of $50,000 ($100,000 before the discount) from selling a real property. The
Trust Deed provides the Trustee with power to advance capital of the Trust to any beneficiary (clause 12).
The Trustee resolves on 28 August 2011 to:
“Distribute the capital profits/gains made from the sale of the property located at … to Q as an
advance of capital pursuant to the power contained in clause 12.”

the Trust Deed includes the entire capital gain as income – the Trustee can make a beneficiary
specifically entitled to the capital gain by distributing the appropriate amount of income carefully
described as income constituting capital gains (or profit) referable to the asset.
Example (14)
Using the same facts as in Example (13) except that in this case the Trust Deed specifically includes all
capital gains as income. There is also a clause in the Deed (clause 13) which allows the Trustee to
distinguish between and allocate income from various sources (including capital gains).
The Trustee resolves as at 30 June 2011 to:
“Distribute that part of the income of the Trust which consists of capital gains/profits from the sale of
the property located at … to Q.”

the Trust Deed adopts subsection 95(1) terms (an income equalisation clause). Where the capital
gain is undiscounted it will be necessary to allocate the entire capital gain as income. Where the
3
This ignores the potential of treating capital gains as ordinary income as supported by the decision in Clark v Inglis [2010] NSWCA
144.
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capital gain is discounted, one half of the capital gain is allocated as income and the other half as
a capital distribution.
Example (15)
Again the facts are the same as in Example 13 except that in this case the Trust Deed treats only that
part of the capital gain which is taxable as income.
The Trustee resolves as at 30 June 2011 to:
“Distribute that part of the income of the Trust which consists of capital gains/profits from the sale
of the property located at … to Q; and
Distribute that part of the capital profits/gains made from the sale of the property that is not
included in the income of the Trust as an advance of capital pursuant to the power contained in
clause 12 to Q”.
It would be possible to make the capital advance at any time up to 31 August 2011 but the income
distribution must be made before 1 July 2011.

The Trust Deed allows the Trustee to treat a receipt as income or capital in the trustee’s
discretion. In this case the Trustee will allocate the capital gain as income or distribute it as
capital as is appropriate.
In this case there would need to be either an income distribution or an advance of capital or a mixture of
both.
Question (7)
What happens when there is no trust law income?
The proposals do fix the notorious problem of distributing a taxable capital gain when there is no trust
accounting income. The classic example is where a holiday house is held by the trustee of a
discretionary trust and the property has been used for private purposes and never rented out. There is
no trust law income to allow the capital gain to be assessed in the hands of a beneficiary. Adopting a tax
equalisation clause has fixed the problem in the past. Now there is no need to take this approach
because a beneficiary can be made specifically entitled to the capital gain. Division 6E will technically
operate but there is nothing to be adjusted because there was no amount ever to be included in the trust
law income (where the Trust Deed provides that trust income is ordinary income). If the capital gain is
included income by the Deed then Division 6E will adjust the section 97 result.
Example (16)
The SK Family Trust acquired the SK Family’s coastal holiday home on 1 January 1990 for $100,000. It
has entered into a contract to sell the property on 28 June 2011 for $900,000. The property has never
been rented out but has been used solely for family holidays.
The Trust Deed is silent as to what is income of the trust. There is no income to which a beneficiary may
become presently entitled. The profits are capital gains.
On 28 August 2011 the Trustee exercises a power in the Deed to advance capital of $800,000 to K. K is
specifically entitled to the capital gain and will include $400,000 in his assessable income.
Prior to the amendments, the Trust Deed would need to have been amended before 30 June 2011 to
change the basis on which income is recognized for trust law purposes to a subsection 95(1) equalization.
Question (8)
Are the problems of life estates solved?
The position of life estates has been untenable. The life tenant has no entitlement to capital but was
assessable on taxable capital gains. The remaindermen had no immediate right to access the capital and
could not contribute from the capital. Many testamentary trusts have been forced to adopt tax
equalisation clauses for the determination of income entitlements so that the trustee could discharge the
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tax liability from the capital “income”. This situation drove the Commissioner to release PS LA 2005/1
(GA).
Proposed section 115-230 allows the trustee to choose to be assessed on the capital gains where:


A beneficiary is specifically entitled to the *capital gain; and
The beneficiary is not paid or has applied to the beneficiary’s benefit trust property representing
the capital gain within 2 months of the end of the income year.
If the trustee does choose to be taxed either section 99 or section 99A applies4.
These proposed measures do not apply only to life estates. Any specific entitlement to capital gains
made by a resident trust can be subject of an election by the trustee.
Example (17)
Prior to his death in 2005 Mr A held a significant listed company share portfolio. In his will he provided
that his wife was entitled to the income from the portfolio for her life and, on her death, the shares are to
be shared equally between his two sons. The will does not define income of the Estate. The Estate has
been fully administered by the 2011 income year. This is a classic life estate.
The Trustee of Mr A’s estate sells a parcel of the shares and generates a discount capital gain of
$100,000 ($200,000 before discount). Mrs A is entitled to the fully franked dividends of $100,000.
Ordinarily Mrs A will be assessed on the discount capital gain because she is the only beneficiary entitled
to income of the life estate. However, she has no right to capital of the trust to pay the tax liability. The
remainderman have no entitlement to the capital gain until Mrs A’s death. However, under the new
provisions they will have a specific entitlement (as they can be reasonably expected to receive the
financial benefit in the future). They will not be paid or have applied to their benefit trust property
representing the capital gain. As a result the Trustee can elect to be taxed on the capital gain.
The problem here is that the Estate has been fully administered with the result that section 99A applies.
The discount will be lost.
This is not a satisfactory outcome. The amendments only partially resolve the problem.
Question (9)
What happens when capital gains and/or franked distributions exceed net income?
The streaming provisions as they relate to capital gains included in the beneficiary’s assessable income
an amount equal to the beneficiary’s share of the *capital gain of the Trust as worked out under section
115-215. The multipliers of 2 (discount or small business reduction) or 4 (discount and reduction) apply
through the method statement in subsection 102-5(1) and then capital losses are applied. The normal
operation of the method statement then applies (division by 2 or 4 as appropriate) but there is no longer
any deduction of the original amount included as was formerly the case. Subsection 115-215(6) has been
repealed. Division 6E now does the work that was formerly done by subsection 115-215(6) to prevent
double taxation.
If the sum of the capital gains that are assessed to a beneficiary by the operation of subdivision 115-C
and the method statement in subsection 102-5(1) and the franked distributions assessed under
subdivision 207-B exceeds the net income of the trust then the capital gains are reduced by the excess.
If there is more than one capital gain or beneficiary the share is rateably reduced.
Example (18)
The trust has a discount capital gain of $100 and revenue expenses of $30.
4
See IT 2622 “Present Entitlement During the Stages of Administration of Deceased Estates” for guidance.
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specifically
Trust
$100 capital gain
$30 revenue
expenses
entitled to
capital gain of
$100
A
assessed on
capital gain
$50?
$20 net income
Paragraph 115-225(2)(b) provides that if the aggregate of the net capital gain of the trust (here $50) and
franked distributions of the trust exceeds the net income of the trust there is a rateable reduction in the
amount which is attributed. In this particular case the capital gain will be limited to $20.
Question (10) – How do franking credits work with a streamed dividend?
Prior to the amendments a trust receiving a dividend of $70 also included $30 of franking credits in its
assessable income (subsection 207-35(2)). The beneficiary obtained a franking credit equal to the
proportionate share of underlying franking credit included in the trust’s assessable income provided the
trust had a positive net income (sections 207-55 and 207-57).
It was implicit in this model that streaming of franked distributions was possible. The Example set out in
section 207-55(1)(a) foreshadows the financial benefit approach when it provides that the franked
distribution of a trust is allocated notionally amongst entities who “derive benefits from that distribution”.
The new provisions (introducing a new subsection 207-35(4)) work in somewhat the same way. The
Example now in subsection 207-35(4) is otherwise practically identical. However, this apparent simplicity
masks a trap.
The critical issue is found in new subsection 207-55(4). To the extent that there are no net franked
dividends in the trust the ability to enjoy the benefit of a franking credit in the trust will depend on whether
or not there is income of the trust (this is not new) and there is no capital gain with which a beneficiary is
specifically entitled. This is best illustrated by Examples.
Example (19)
The ZT Family Trust derives a franked dividend of $70 and net rents of $100. The trustee incurs
expenses of $100 which are directly related to the franked dividends. The trust income is $70 and the tax
law net income is $100.
The trustee appoints the trust income to Z. Does Z enjoy the benefit of the franking credits?
The share of the franked distribution of Z is the adjusted Division 6 percentage of the income of the Trust.
As Z enjoys the entire trust income Z also is attributed with all of the franking credits of the trust ($30).
Example (20)
In this case the expenses of the trust are $200. There is no tax law net income and in consequence the
franking credits remain in the trust (see Column 2 of item 3 in the Table in Subsection 207-55(3)).
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Example (21)
In this case the trust has a discount capital gain of $50 ($100 before discount). The trustee also derives a
franked dividend of $70 and has expenses of $100. The Trust Deed is silent as to the meaning of income
and there is no power to recharacterize as income or capital.
The trustee advances $100 of the capital of the trust to Z referable to the capital gain. Z is specifically
entitled to the capital gain. There is no income. Is Z entitled to the franking credits?
The amount of the franked distribution is the sum of the franked distribution to which the beneficiary is
specifically entitled and the amount of the franked distribution of the trust to which no beneficiary is
specifically entitled multiplied by Z’s adjusted Division 6 percentage. In simple terms:
Franked
distribution
=
Specifically
entitled franked
distribution
+

non-specifically
entitled franked
distribution
x
Adjusted Division
6 percentage

There is no trust income to which Z is entitled. In this instance:
Franked distribution = 0 + ($70 x 0)
The franked distribution is nil. The franking credits are trapped in the trust.
This comes about only because the trustee make Z specifically entitled to the entire capital gain.
Example (22)
In this case the income definition in the Trust Deed includes all of the net capital gain as income. The
trustee appoints all of the capital gain to Z as income referable to the capital gain. Z is again specifically
entitled.
The outcome is the same as in Example (21). The franking credits are trapped in the trust. Here there is
income (being the capital gain) but the adjusted Division 6 percentage takes it out.
Example (23)
In this case the trustee appoints the income (which is the capital gain) to Z but does not make Z
specifically entitled.
The adjusted Division 6 percentage is 100%. Z is entitled to all of the franking credits.
Example (24)
In this case the facts remain the same except that the Trust Deed adopts subsection 95(1) terms to
define income of the Trust.
The trustee appoints the capital gain in the income to Z so Z is specifically entitled. No capital distribution
is made. Z is specifically entitled to one half of the capital gain. The other half will be capital gain to which
no beneficiary is specifically entitled. In other words Z will include $25 as income but being capital gain to
which Z is specifically entitled. The other $25 is assessable to Z but Z is not specifically entitled. The
franked distribution enjoyed by Z is:
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Specifically
entitled franked
distribution
+

non-specifically
entitled franked
distribution
x
Adjusted Division
6 percentage

= 0 + ($70 x 100%)
= $70
Z is entitled to all of the franking credits.
These examples appear to contradict the observation made in paragraph 2.61 of the Explanatory
Memorandum:
“There is no change to the current rules that allow franking credits to flow proportionately to
beneficiaries that have a share of a trust’s (positive) net income for an income year
notwithstanding that the franked distributions of the trust were entirely offset by expenses.”
As can be seen from the above illustrations it is critical that the trustee precisely understands the income
definition of the trust and its ramifications when the franked dividends are negatively geared.
It might be noticed that the above illustrations carefully select the amount of directly related expenditure
as $100. This is designed to eliminate the difficult issue of franking credits being included in the trust law
income. If the Trust Deed adopts unadjusted subsection 95(1) terms it is arguable that the trust income is
$100 and not $70. If the expenses were $70 only then the income available will be $30. That $30 is not
franked distribution but is income.
Example (25)
The ZT Family Trust has an unadjusted tax equalization definition of income. It has a discount capital
gain of $50 ($100 before discount) and a franked distribution of $70. The directly related expenses are
$70. The trust law income (on the assumption that the franking credit is income of the trust) is $80. The
trustee makes Z specifically entitled to the capital gain. The balance of the income is appointed to B ($30).
The adjusted Division 6 percentage of Z is nil. The adjusted Division 6 percentage of B is 100%. B enjoys
all of the franking credit set off.
The ATO has in the past strenuously argued that franking credits cannot be included in the trust law
income as they are purely notional amounts. From discussions with Treasury the ATO appears to have
done a volte-face on this issue. Treasury appears to take the opposite view. It is difficult to know where
this leaves practitioners.
Question (11) – What happens when the trust has notional capital gains?
Notional capital gains can be generated in a trust for many reasons. Some examples are:





market value substitution for the capital proceeds where there is a disposal not on arm’s length
terms;
acquisitions on non-arm’s length terms with market value substitution and a subsequent disposal;
a resettlement triggering CGT event E1;
an in specie distribution to a beneficiary triggering CGT event E5;
a trust ceasing to be a resident trust.
The streaming rules anticipate the mismatch that will be created between the notional financial benefit
and the actual financial benefit accruing to the trustee. When calculating the amount of the *capital gain
to which a beneficiary becomes specifically entitled the market value substitution rules are to be
disregarded (these are sections 112-20 and 116-30) to the extent that they increase the amount of the
capital gain.
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There is a cryptic observation in paragraph 2.59 of the Explanatory Memorandum. After commenting that
a beneficiary cannot be specifically entitled to a deemed gain because there is no economic benefit
referable to the deemed gain it is observed that:
“whether a beneficiary can be specifically entitled to a capital gain or franked distribution is a
question of fact. For example, when a beneficiary becomes absolutely entitled to a trust asset, it
may be reasonable to expect the beneficiary will receive the net financial benefit referable to the
deemed (trust) capital gain from CGT event E5.”
This appears to overlook the fact that there is no trust law capital gain in the trust (unless there was a
revaluation – cf. Example 2.3 in the Explanatory Memorandum).
Example (26)
The XT Family Trust owns an allotment of land on which beneficiary X wishes to build a family home.
The land cost $100,000 5 years ago and is now worth $600,000. The trustee agrees to sell the land to X
for $1.
The market value substitution rule applies to increase the capital proceeds to $600,000. The trustee
derives a tax law capital profit of $500,000. It is a discount capital gain of $250,000. X has the land and
in that sense has the entire financial benefit referable to the capital gain on the asset. However, there is
a mismatch because X did not obtain the financial benefit in accordance with the terms of the Trust.
Moreover, there was no trust law capital gain generated by the trust. Rather, there was a capital loss for
trust accounting purposes. There is no amount of the capital gain which can be appropriated to the
beneficiary to ensure that they can become specifically entitled.
It is questionable in this Example as to whether the beneficiary can be made specifically entitled.
At paragraph 2.56 of the Explanatory Memorandum it is observed that it is not possible to stream tax
amounts where there is no referable net financial benefit remaining in the trust. By contrast in paragraph
2.54 it is observed that the net financial benefit referable to a capital gain “will generally be the trust
proceeds reduced by any costs incurred in relation to the relevant asset (and further reduced by any
capital losses)”. This suggests that the $1 of capital proceeds is the financial benefit. If this was the case
then a capital distribution by the trustee of the $1 to X may cause X to be specifically entitled to the
capital gain of the trust in respect of the land.
We may hope for clarification.
Example (27)
If instead of $1 X paid the trustee $100,100 then made a capital distribution of $100 to X. This would
make X specifically entitled to the *capital gain on the land.
Question (12) What happens when the ATO makes an adjustment?
In a recent paper to the Tax Institute5 the author spent a very great deal of time suggesting means by
which franked dividends could be directed to children so that the use of the low income tax offset could
maximize the benefit from the trust. As a result of the 2011-2012 Budget announcement the low income
tax set off will not be available to most minors for the 2012 income year and beyond. However, it is still in
play for the current income year. The ability to stream franking credits will enable much more effective
use of the set off for this one year.
That paper also dwelt on whether the distributions to the children could be locked in in a “quantum” sense
by using a balance beneficiary approach. It was concluded that this could be done if a tax equalisation
clause was included in the Trust instrument.
5
“The State of Play – Trust Decision Making” presented to the Queensland Division’s conference “2010 - A Year of Critical Change”
8 November 2010
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After 30 June 2011 the streaming issue in the context of appropriating a fully franked distribution to a
child will be largely irrelevant. However, the balance beneficiary issue will remain very important
particularly in the context of potential adjustments to tax law net income by the Commissioner.
The question for this paper is whether the proposed amendments change the balance beneficiary
approach.
The term “balance beneficiary” refers to distributing income of the trust (equal to the tax law net income
by virtue of the tax equalisation clause) in the following fashion (for 2011):
“To:
child 1
child 2
$3,333
$3,333
The balance of the income to Mr A and Mrs A in equal shares.”
If the tax law net income of the trust is $20,000 then the trust entitlements will be:
child 1
child 2
Mrs A
Mr A
$
3,333
3,333
6,667
6,667
20,000
The tax law results will be exactly the same.
If the Commissioner adjusts the tax law net income by say $80,000 (bringing it to $100,000) for the
reasons advanced in the above-mentioned paper the trust law and tax law results should again be the
same:
child 1
child 2
Mrs A
Mr A
$
3,333
3,333
46,667
46,667
100,000
As described in the earlier paper the result will not be the same if ordinary income is the trust accounting
income basis.
Do the proposed amendments change this?
If there are no specific entitlements to franked distributions or capital gains nothing should change.
If there is a specific entitlement to a franked distribution is there any change? Say the distribution
includes a franked distribution of $700 to each of Mr and Mrs A but not the children. Mr and Mrs A would
each include $700 plus a gross up of $300 in their assessable incomes. This would pass through
subdivision 207-B and be adjusted by Division 6E out of their Division 6 amount.
The trust minutes would be:
Distribute:



$700 of fully franked dividends to each of Mr and Mrs A (having regard to clause x of the Deed); 6
$3,333 to each of child 1 and child 2;
the balance of the net income equally between Mr and Mrs A.
The trust entitlements would be (assuming the definition of trust law income adopts subsection 95(1)
income but not including the gross up under sub-division 207-B):
6
Clause x is an income streaming clause.
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$
3,333
3,333
6,667
6,667
20,000
child 1
child 2
Mrs A
Mr A
The tax law distributions would now be:
child 1
child 2
Mrs A
Mr A
Mrs A
Mr A
$
3,333
3,333
1,000 ff dividend
1,000 ff dividend
5,967
5,967
20,600
Assume that the $80,000 adjustment is to income other than the franked dividends received by the
trustee. How do the proposed amendments affect the outcome? The specific entitlements remain the
same. However, the Division 6E adjustment has been enlivened in respect of the $1,400 franked
distribution. The elements of Division 6E before the ATO adjustment were:
trust income
tax law net income
$20,000 - $1,400 = $18,600
$20,600 - $2,000 = $18,600
Division 6 present entitlements:
child 1
child 2
Mrs A
Mr A
$
3,333
3,333
5,967
5,967
This supports the outcome set out above.
What happens when there is an upward adjustment of $80,000 to the Division 6 amount?
The Division 6E adjustment is:
trust income
tax law net income
$100,000 - $1,400 = $98,600
$100,600 - $2,000 = $98,600
Division 6 present entitlements:
child 1
child 2
Mrs A
Mr A
$
3,333
3,333
45,967
45,967
98,600
It would appear that the balance beneficiary approach has not changed as a result of the proposed
amendments.
If, however, the ATO adjustment was made to the franked dividends then there would be no specific
entitlement to the $80,000 additional assessable amounts.
The franked distribution which had not been specifically allocated will be distributed in accordance with
the adjusted Division 6 percentage of the income of the trust applicable to that beneficiary.
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The adjusted Division 6 percentages of the income are:
Adjusted income
$
3,333
3,333
5,967
5,967
18,600
Child 1
Child 2
Mrs A
Mr A
%
17.92
17.92
32.08
32.08
100
The franked distribution to which no beneficiary is specifically entitled will be apportioned according to the
adjusted Division 6 percentage. The amounts included in the assessable income before gross up for
franking credit:
$
Child 1
3,333
adjustment
$
14,336
total
$
17,669
Child 2
3,333
14,336
17.,669
Mrs A
5,967
25,664
31,631
Mr A
5,967
25,664
31,631
18,600
80,000
98,600
Mr and Mrs A also have a fully franked dividend each of $700 plus the gross up.
The way in which franked distributions (and capital gains) which have not been subject of a specific
entitlement are proportioned according to the adjusted Division 6 percentage forces a great deal of
assessable income to the children which will be taxed at the punitive rates of Division 6AA of the 1936
Act.
This may be able to be remedied by appointing all franked distributions to Mr and Mrs A in equal shares.
Such a resolution should protect the balance beneficiary approach from non-specifically appointed
franked distributions (and capital gains). The resolution needs to be very carefully drafted.
Question (13) Is asset protection affected?
The ability to cause the tax liability on a capital gain to follow a very small distribution of trust law income
without distribution in fact of the capital gain has been a very useful asset protection tool.
Example (28)
For example, say a $1,000,000 discount capital gain has been made by a trustee of a discretionary trust
and the only other income is $100 interest. The trustee appoints the $100 of ordinary income to the
beneficiary (assuming capital gains are not included in income) and the beneficiary is subject to tax on
$500,100. The beneficiary has a right to be paid $100 only. The beneficiary might borrow from the
trustee and give a mortgage security over his or her personal residence in respect of the borrowing.
Do these proposed amendments change this device? It would appear not as there is no compulsion to
make a beneficiary specifically entitled to a trust capital gain. It is entirely up to the trustee. While the
non-specifically entitled capital gain passes through Subdivision 115-C it does so with the usual effect
and outcome.
Question (14) Do Trust Deeds need amending?
After all of the above the simple question to be answered is, is there a need to amend your Trust Deed to
deal with these issue? In the writer’s view there will be some usually older Deeds that require attention.
This will be because there is no streaming clause or it is deficient. Modern Deeds invariably have an
adequate streaming clause. Nevertheless you should read the provision to make sure it works.
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The main things which will allow practitioners to cope with these new measures are:
 having a flexible income definition in the Deed;  understanding how the income definition works in the particular circumstances faced. Most, but not all, modern Deeds have flexibility about defining income. A small number do not and they
do need attention.
Conclusions:
There is a significant number of trips and traps to look out for when considering streaming in 2011 and
beyond. Notably:
1. creating a specific entitlement to a capital gain requires a consideration of the way in which the
Trust Deed defines income;
2. the beneficiary must be made entitled to the entire financial benefit of the trust law capital gain to
be specifically entitled to the tax law *capital gain;
3. capital losses of the trust must be dealt with consistently from a trust law and tax law perspective;
4. when dividend income of a trust is negatively geared the dividends cannot be streamed unless
pooled;
5. negatively geared franked distributions may or may not allow beneficiaries to benefit from the
franking credits. The definition of income and whether or not capital gains are streamed will play
a part of this.
6. there is nothing to stream if the trust does not have positive tax law net income;
7. while the two months period for making a beneficiary specifically entitled is relevant and useful, it
must not be overlooked that where capital gains are included in income the beneficiary must be
made presently entitled to that income by year end;
8. if a trust is dependent on satisfying the significant individual test for the small business CGT
concessions great care needs to be taken in streaming capital gains;
9. the life estate problem may be resolved but often at the cost of a section 99A assessment. Better
to rely on including capital gains as income in the testamentary trust;
10. the balance beneficiary approach may still be used provided the capital gains and franked
distributions which might suffer an ATO adjustment are brought by resolution into a specific
entitlement.
O
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24