iscoverDistributions to corporate beneficiaries can result in some unexpected and unforgiving tax outcomes.
Distribution traps for corporate beneficiaries
07 August 2025
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15 minute read
A myriad of tax issues need to be considered when trust income is distributed to corporate beneficiaries, typically private companies (the company). These include:
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Determining the income of the trust in accordance with trust law and the terms of the trust deed.
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Ensuring the company is an eligible beneficiary of the trust.
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Ensuring the trustee confers a present entitlement on the company by 30 June.
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Considering the application of section 100A of the Income Tax Assessment Act 1936 (ITAA 1936).
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Correctly applying the streaming rules relating to capital gains and franked distributions.
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Considering the application of Division 7A to any unpaid present entitlements (UPEs), particularly in light of the Full Federal Court’s decision in Commissioner of Taxation v Bendel [2025] FCAFC 15, which the Commissioner of Taxation has appealed to the High Court.
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Confirming that the trust has made a family trust election (FTE) to make a franked distribution to the company.
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Confirming that the company has made an interposed entity election (IEE) to be, or is otherwise, part of the family group of the individual specified in the FTE made by the trust.
While this non-exhaustive list can easily confuse, even overwhelm, trustees and practitioners, two additional considerations warrant discussion.
Practitioners are reporting an emerging issue: the ATO is denying the claiming of franking credits in certain situations involving corporate beneficiaries, giving rise to significant, unexpected tax bills. Further, the operation of the closely held trust TFN reporting and withholding rules can compound existing concerns.
Both these matters are explained below.
Franking credits and the 45-day holding period rule
It is common for corporate beneficiaries to be made presently entitled to franked distributions from related family trusts and claim the franking credits against the resulting tax liability. In some cases, the ATO is denying the franking credits because the corporate beneficiary is outside the family group. In other cases, a concerning picture is emerging of franking credits being denied in recent ATO reviews on the basis that the 45-day holding period rule has not been satisfied.
What is the 45-day holding period rule?
The claiming of franking credits, which are attached to franked distributions made by trustees of family trusts to corporate beneficiaries, is subject to the 45-day holding period rule. This rule is contained in former Division 1A of Part IIIAA of the ITAA 1936, as in force on 30 June 2002. The rule is referred to in determining whether an entity is a ‘qualified person’ for the purposes of paragraphs 207-145(1)(a) and 207-150(1)(a) of the Income Tax Assessment Act 1997 (ITAA 1997) in respect of a franked distribution made directly or indirectly to the entity after 30 June 2002. The references in Division 207 of the ITAA 1997 treat former Division 1A as remaining in effect, despite its repeal in 2002.
The rule requires a beneficiary to continuously hold shares ‘at risk’ for at least 45 days (90 days for preference shares), not counting the day of acquisition or disposal, to be eligible for a franking tax offset. If shares, or an interest in shares, are acquired and the holding period rule has not been satisfied before the day on which the shares become ex-dividend, the beneficiary will not be entitled to the franking credits.
ATO denying franking credits
The ATO appears to have taken the position that a person or entity can acquire an interest in the underlying shares only on the day that it becomes a ‘potential beneficiary of the trust’. Accordingly, the ATO seems to be of the view that, if a company did not exist on the ex-dividend date, the entity cannot satisfy the 45-day holding period rule because the entity will have acquired an interest in the shares only on the day that it became a ‘potential beneficiary’ of the trust, being the day that it was incorporated. This is irrespective of the fact that the trustee may have held the shares for many years.
This is problematic where a family trust holds shares in a company that became ex-dividend in an income year, and that trust makes a franked distribution to a corporate beneficiary which was incorporated in the closing weeks or days of that income year. If the ATO maintains its current position — which is not published on the ATO website or widely known — newly incorporated corporate beneficiaries are not entitled to the franking credits in these circumstances.
Legislative clarity needed
The inaccessibility of the 45-day holding period rule (the ITAA 1997 contains only references to the former provisions) exacerbates the difficulties for practitioners and taxpayers, and demonstrates the need for clearer provisions.
Public advice and guidance by the ATO, outlining its position and the Commissioner’s views on the application of the repealed provisions, is desperately needed to prevent unforeseen tax liabilities arising from the loss of franking credits.
Whether the ATO’s position is correct is untested before the Administrative Review Tribunal or the Courts, so judicial clarification would be welcome. Better still, legislative reform is clearly warranted.
TFN reporting and withholding rules
Broadly, the purpose of the tax file number (TFN) reporting and withholding rules is to subject a trustee of a resident closely held trust (CHT) to TFN withholding where a distribution is made to a beneficiary and the beneficiary has not quoted their TFN to the trustee before the distribution is made.
The measures are contained in Division 4B of Part VA of the ITAA 1936 and Subdivision 12-E of Part 2-5 of Schedule 1 to the Taxation Administration Act 1953 (TAA).
When do the rules apply?
The rules impose reporting and withholding obligations on trustees of resident CHTs where:
Either:
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During an income year, the trustee makes a distribution to a beneficiary of the trust and some or all of the distribution is from the ordinary or statutory income of the trust (payment).
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At the end of the income year, a beneficiary of the trust is presently entitled to a share of the income of the trust of that year (distribution).
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The trust is not an excluded trust under subsection 102UC(4) of the ITAA 1936.
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The beneficiary is not an excluded beneficiary.
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The payment or distribution is not excluded.
What is a closely held trust?
For these purposes, a CHT is a trust that:
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Has up to 20 individuals who have between them, directly or indirectly, fixed entitlements to at least a 75% share of the income or capital of the trust.
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Is a discretionary trust — this includes a trust that has made an FTE (a family trust) or is covered by an IEE.
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Is not an excluded trust.
Excluded trusts
An excluded trust includes a trust to which, awkwardly, paragraph (b), (c) or (d) of the definition of ‘excepted trust’ in section 272-100 of Schedule 2F to the ITAA 1936 applies. Notably, a family trust (in paragraph (a) of section 272-100) is not listed in subsection 109UC(4), so a family trust is subject to the TFN reporting and withholding rules.
Excluded beneficiaries
Excluded beneficiaries include:
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Non-resident beneficiaries.
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Exempt entities, such as charities.
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Beneficiaries who are under a legal disability — this includes minor beneficiaries.
Pension recipients (including the age pension and disability support pension) are specifically excluded from other TFN withholding rules, but they are not excluded from quoting their TFN to the trustee of a CHT to prevent a withholding.
Excluded payments and distributions
Excluded payments and distributions include:
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Payments and distributions below the prescribed annual threshold of $120.
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Payments of UPEs arising in earlier income years that were subject to the TFN withholding rules.
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Distributions made to trustee beneficiaries as the trustee is already required to make a correct trustee beneficiary statement.
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Amounts on which family trust distribution tax is payable.
Trustees’ obligations
Trustees of CHTs:
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Should advise the trust’s beneficiaries that withholding may be required if they do not quote their TFN to the trustee before they receive a payment from the trust or become presently entitled to trust income for an income year.
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Must lodge an Annual trustee payment report (part of the trust tax return) to report total payments and distributions made to each beneficiary in the income year.
Quoting a TFN
A beneficiary quotes their TFN by providing the trustee with their:
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TFN
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Full name
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Date of birth (individual beneficiaries only)
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Postal address
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Business or residential address
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Entity type
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ABN if the beneficiary has one (non-individual beneficiaries only)
There is no prescribed format for providing this information, and it can be provided verbally or in writing (including electronically).
Consequences for the trustee
If a beneficiary quotes their TFN
If a beneficiary quotes their TFN to the trustee before the payment or distribution is made, the trustee must lodge a TFN report with the ATO by the last day of the month following the end of the quarter in which the TFN was quoted.
For present entitlements arising in the June quarter (typically on 30 June) of an income year, the due date of the TFN report is 31 July. The trustee does not need to lodge a TFN report for a quarter if no new TFNs are quoted in that quarter.
A TFN report can be lodged using:
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Standard Business Reporting (SBR) enabled software.
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A paper TFN report (a fillable PDF that can be completed online, saved and printed, or completed by hand).
If a beneficiary does not quote their TFN
If a beneficiary does not quote their TFN to the trustee before a payment or distribution is made, the trustee must:
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Confirm that the payment or distribution is subject to TFN withholding.
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withhold from payments or distributions made to the beneficiary at the rate of 47% at the time the payment or distribution is made.
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Lodge an Annual TFN withholding report by 30 September with details of the payments and distributions and any withheld amounts.
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Provide a payment summary within 14 days after the due date for lodgment of the Annual TFN withholding report (i.e. by 14 October) to each beneficiary that had amounts withheld.
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Lodge an annual activity statement with the ATO and pay the withheld amounts within 28 days after the Annual TFN withholding report is due to be lodged (i.e. by 28 October).
TFN withholding does not give rise to double taxation. Beneficiaries can claim a credit for the withheld amount in their tax return for the income year in which the distribution was made.
Where withholding applies, the trustee needs to work out the beneficiary’s share of the trust’s net income. This necessitates determining the trust’s net income by 30 September in order to lodge a correct Annual TFN withholding report. While trustees must confer present entitlements to the trust income by 30 June, the trust’s net income may not be determined until closer to the lodgment day of the trust’s tax return, likely to be some time after 30 September.
Penalties
Penalties apply for failing to:
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Withhold when required — equal to the amount that should have been withheld.
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Pay a withheld amount by the due date — the general interest charge (GIC), which is non-deductible from 1 July 2025, applies to missed and late payments.
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Lodge reports on time — the amount of the failure to lodge penalty is based on the size of the entity (i.e. small, medium or large).
Implications for corporate beneficiaries
Corporate beneficiaries that become presently entitled to a share of income of a CHT need to quote their TFN to the trustee to ensure that the trustee is not subject to:
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Withholding from that distribution.
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The associated reporting obligations (other than the TFN report).
Where a newly incorporated corporate beneficiary becomes presently entitled to a share of trust income for an income year, the trustee must consider the TFN reporting and withholding rules. If the ATO does not issue a TFN to the company until early July, the company could not have quoted its TFN to the trustee before it became presently entitled. It does not matter that the TFN is issued to the company before the due date of the TFN report (31 July).
This means the trustee:
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Should lodge a TFN report in respect of the company’s TFN (but only if it was quoted before the present entitlement arose).
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May need to lodge an Annual TFN withholding report by 30 September.
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May need to issue the company with a payment summary by 14 October.
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May need to lodge an annual activity statement with the ATO and pay the withheld amount by 28 October.
Closing comments
Trustees must always be aware of, and meet, their tax obligations. This includes trustees of CHT turning their minds to the TFN reporting and withholding rules where:
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Distributions are made to newly incorporated corporate beneficiaries;
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New trusts are established — the trustee should request the TFN details of potential (i.e. intended) beneficiaries;
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The trustee of an existing trust intends to make a beneficiary presently entitled to a share of the trust’s income for the first time (e.g. new spouse of an existing beneficiary); and
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A minor beneficiary turns 18 years of age — the age of minors should be monitored annually to ensure that these beneficiaries quote their TFN to the trustee once they turn 18.
About the Author
Robyn Jacobson is the senior advocate at The Tax Institute.
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