Should X Trust's AMIT Member Annual Statements for the income year ended 30 June 20XX, that were provided to its members in accordance with paragraph 276-460(2)(a) of the Income Tax Assessment Act 1997 , have included any determined member component of a character relating to a franking credit tax offset?
No This ruling applies for the following period : Income tax year ended 30 June 20XX The scheme commences on: 1 July 20XX
X Trust is a managed investment trust that has elected to become an attribution managed investment trust (AMIT) under section 276-10 of the Income Tax Assessment Act 1997 (ITAA 1997). The trustee of X Trust is Y. Y is a corporation established under the Public Trustee Act 1978 (Qld). Y is also the manager of X Trust. In this capacity, it determines the investment strategies and objectives for X Trust, ensures any monies are properly invested and ensures the investment manager achieves acceptable rates of return. The investment manager of X Trust is X Limited. X Trust receives income from units it holds in a fund established by X Limited and interest income from cash held for liquidity purposes. For the income year ended 30 June 20XX, X Trust received assessable income including franked distributions. There were franking credits of $X on the franked distributions and a foreign income tax offset of $X. After offsetting its expenses (including trustee fees), X Trust was in a tax loss position of $X for the income year ended 30 June 20XX.
Y completed the Attribution Managed Investment Trust Member Annual Statements (AMMA statements) for X Trust for the year ended 30 June 20XX. These were provided to the members. In each AMMA statement, Y did not include any determined member component of a character relating to a franking credit tax offset.
Income Tax Assessment Act 1997 Section 207-20 Income Tax Assessment Act 1997 Section 276-80 Income Tax Assessment Act 1997 Section 276-85 Income Tax Assessment Act 1997 Section 276-265 Income Tax Assessment Act 1997 Paragraph 276-460(2)(a)
Generally speaking, the attribution model of taxation for an AMIT involves the following steps: • The trustee of an AMIT calculates the total of the amounts associated with the various activities of the AMIT that attract different tax consequences - that is, the 'trust component' of each particular character. • The trust components become the 'determined trust components' when stated to be the AMIT's trust components in a document that meets certain legislative requirements. • The trustee works out the 'member component' of a character, which is so much of the AMIT's determined trust component of that character as is attributable to the membership interests in the AMIT held by the member. • Each of the member components as reflected in the AMIT's latest AMMA statement for the income year are the 'determined member components' for that income year. • The amount recognised by the members for their income tax purposes in relation to their investment in an AMIT is the determined member component, which is generally the amount shown on the AMMA statement issued by the AMIT.
The role that the AMMA statement plays in this attribution model is explained in the Explanatory Memorandum to the Tax Laws Amendment (New Tax System for Managed Investment Trusts) Bill 2015 (the EM ) as follows: 3.61 The AMMA statement that is given to an entity that is a member of an attribution MIT in respect of an income year sets out the member's determined member components for that income year. The objective of the AMMA statement is to ensure that the information provided by the trustee of an attribution MIT to a member is sufficient for that member to complete their income tax return. Therefore, it is the design principle of the attribution model that the members rely on the information contained in the AMMA statement, which the EM confirms as follows: 7.15 A taxpayer is responsible for ensuring that the taxable income reported in their income tax return is correct. A taxpayer who holds investments will often rely on information provided by other parties to determine the amount to include in their assessable income. However, taxpayers must make appropriate judgements to ensure they report the correct amount of assessable income. When paragraph 276-460(2)(a) of the
Income Tax Assessment Act 1997 (ITAA 1997) requires the AMMA statement to include 'information that reflects the amount and character of each member component of the member for the income year', it is apparent that the information must not be misleading. The issue is whether the AMMA statements that Y provided to the members of X Trust for the income year ended 30 June 20XX should have included any determined member component ( franking credit component ) of a character relating to a franking credit tax offset. X Trust received franked distributions and franking credits attached thereon for the income year. However, the total assessable income of X Trust for the income year was less than the total deductions for the income year, meaning the amount of each trust component of a character relating to assessable income for the income year was nil as stated in subsection 276-265(3) of the ITAA 1997, with the excess being a tax loss for the trust.
The question then is whether Y would have been allowed to attribute the franking credits to the members despite the fact that X Trust was in a loss position. If it is not able to attribute the franking credits in such circumstances then it is correct to also exclude these credits from the AMMAs as, to do otherwise, would have been misleading for members. The attribution model does not have a specific rule dealing with franking credits. However, the legislative scheme shows that franking credits are passed to the members of an AMIT under the combined effect of section 207-20 of the ITAA 1997 and the deeming under subsections 276-80(1) to (3) of the ITAA 1997. These provisions are as follows: SECTION 207-20 General rule - gross-up and tax offset (1) If an entity makes a *franked distribution to another entity, the assessable income of the receiving entity, for the income year in which the distribution is made, includes the amount of the *franking credit on the distribution. This is in addition to any other amount included in the receiving entity's assessable income in relation to the distribution under any other provision of this Act.
(2) The receiving entity is entitled to a *tax offset for the income year in which the distribution is made. The tax offset is equal to the *franking credit on the distribution. SECTION 276-80 Member's assessable income or tax offsets for determined member components - general rules Components of income character (1) Subsection (2) applies if a *member of an *AMIT in respect of an income year has, for the income year, a *determined member component of: (a) a character relating to assessable income; or (b) a character relating to *exempt income; or (c) a character relating to *non-assessable non-exempt income. (2) For the purpose of working out the effects mentioned in subsection (3) for the *member, treat the member as having derived, received or made the amount reflected in the *determined member component: (a) in the member's own right (rather than as a member of a trust); and (b) in the same circumstances as the *AMIT derived, received or made that amount, to the extent that those circumstances gave rise to the particular character of that component. (3) The effects are as follows: (a) including an amount in the assessable income of the *member;
(b) including an amount in the *exempt income of the member; (c) including an amount in the *non-assessable non-exempt income of the member; (d) determining whether the member has made a *capital gain from a *CGT event; (e) determining the extent to which the member's *net capital loss has been *utilised. The combined effect of the above provisions is that: a. For the members to be entitled to the tax offset under subsection 207-20(2) of the ITAA 1997, the members must be the 'receiving entity', which is, as shown in subsection 207-20(1) of the ITAA 1997, the entity to which a franked distribution is made. b. As it is the trustee of an AMIT, not its members, to which a franked distribution is made, for the members to be the receiving entity, they must be deemed to be the entity to which the franked distribution is made. c. For the members to be deemed to be such an entity, a determined member component of a character related to a franked distribution (the franked distribution component
) must be attributed to the members. The attribution satisfies paragraph 276-80(1)(a) of the ITAA 1997 and, therefore, subsection 276-80(2) of the ITAA 1997 deems the members to have received the franked distribution directly, rather than as members of the AMIT and in the same circumstances as the AMIT received the franked distribution. d. As a result, the members must include the amount of the franking credit on the franked distribution in its assessable income under subsection 207-20(1) of the ITAA 1997 and are entitled to a tax offset under subsection 207-20(2) of the ITAA 1997.
In the present case, Y could not attribute any franked distribution component to the members of X Trust because it was in a loss situation. As this means that the members were not deemed to be the receiving entity of a franked distribution, the members were not entitled to a franking credit tax offset under subsection 207-20 of the ITAA 1997. Therefore, notwithstanding that X Trust received franking credits in the income year, Y is correct to have not included any franking credit component in the AMMA statements for the income year because doing so would have given the members misleading information as to their entitlement to the franking credit tax offset. Whilst it may be alternatively argued that Y would have been able to make the members entitled to the franking credits tax offset, were it to have included the franking credit component in the AMMA statements because of the deeming under subsections 276-80(4) to (6) of the ITAA 1997, that argument is not accepted. Subsections 276-80(4) to (6) of the ITAA 1997 state that: Components of tax offset character
(4) Subsection (5) applies if a *member of an *AMIT in respect of an income year has, for the income year, a *determined member component of a character relating to a *tax offset. (5) For the purpose of working out the effects mentioned in subsection (6) for the *member, treat the member as having paid or received the amount reflected in the *determined member component: (a) in the member's own right (rather than as a member of a trust); and (b) in the same circumstances as the *AMIT paid or received that amount. (6) The effects are as follows: (a) entitling the member to a *tax offset; (b) entitling the member to a credit under Division 18 in Schedule 1 to the Taxation Administration Act 1953.
Applying the deeming under subsection 276-80(5) of the ITAA 1997, had Y included the franking credit component in the AMMA statements, the members would have been treated as having received the amount reflected in the franking credit component in the members' own right and in the same circumstances as the AMIT received that amount. Whether this deeming would have been sufficient to treat the members as the 'receiving entity' for the purposes of subsection 207-20(2) of the ITAA 1997 depends on the interpretation of the word 'circumstances' appearing in subsection 276-80(5) of the ITAA 1997. On one view, the AMIT's 'circumstances' imputed to the members include the fact that the AMIT received the franking credit because it received the franked distribution (albeit then diminished by allowable expenses). Therefore, the requirement that the members must be the receiving entity of the franked distribution is met through the circumstances of the AMIT, regardless of whether the members have an associated franked distribution component.
On another view, the AMIT's 'circumstances' are to exclude the AMIT's receipt of the franked distribution such that, unless the member also has a franked distribution component, the AMIT must not include any franking credit component in the AMMA statements for that income year. As to which is the better view, the EM supports the latter as being the better view as it states that: 7.40 Subsections 276-85(5), (6) and (7) operate to ensure that section 207-20 applies appropriately for the member in relation to a franked dividend that is attributed to the member by an attribution MIT - that is, the member will: • include both the dividend, and the amount of the franking credit gross-up component, in assessable income; and • be entitled to a tax offset equal to the amount of the franking credit gross-up component.
What the above statement in the EM shows is that the attribution model is intended to ensure that the members are entitled to the franking credit tax offset when the associated franked distribution, not the franking credit, is attributed to the members. Therefore, where an AMIT has no franked distribution to attribute to the members because the distribution is reduced by allowable expenses, the AMIT cannot entitle the members to the franking credit tax offset by including a franking credit component in the AMMA statement. Consequently, having regard to this, the members of X Trust would not have been entitled to any franking credit tax offset in the income year regardless of whether Y had included any franking credit component in the AMMA statements for the income year. In such a situation, it would have been misleading for Y to include a franking credit component in the AMMA statements for the income year. As a conclusion, the AMMA statements for the income year provided to the members of X Trust in accordance with paragraph 276-460(2)(a) of the ITAA 1997 should not have included any franking credit component, and the AMMA statements were correct for their not including it.