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Div 6E income is relevant when your trust income includes capital gains and/or franked distributions.
Div 6E Income
Div 6E income is one of the income definitions you will need to contend with if ….and only if the trust you are working on has capital gains and/or franked dividends.
What income that is, what the different income definitions mean, and how Div 6E works, is what Robyn Jacobson of The Tax Institute will discuss with you in this episode.
Here is what we learned but please listen in as Robyn explains all this much better than we ever could.
To listen while you drive, walk or work, just access the episode through a free podcast app on your mobile phone.
Div 6E Income
Div 6E gives you the Adjusted Div 6E percentage for each beneficiary. That is the percentage of income that each beneficiary received excluding capital gains and franked dividends.
Streaming
You start with the trust’s (taxable) net income as per s95 ITAA 1936. This net income includes capital gains and franked distributions. And then you allocate a proportionate amount of this net income to the relevant beneficiaries through s97 or the trustee through s98 to 99A.
The problem with these core trust rules is that you can’t cherry-pick. You can’t say Mary gets the capital gain, Joseph gets the franked distribution and Mohammed gets the rest. In other words, under the core trust rules you can’t stream.
That is why Subdivision 115-C and Subdivision 207-B of the ITAA 1997 were introduced. They allow you to cherry-pick. They allow you to stream.
Div 6E Avoids Double Counting
So now capital gains and franked distributions are assessed under Subdivision 115-C and Subdivision 207-B of the ITAA 1997 respectively so you can stream.
But …..the result is that you are counting capital gains and franked dividends twice, once under s95 and then also under Subdiv 115-C / 207-B.
So now Division 6E ITAA 1936 is coming to your rescue. Div 6E says. ‘Take any capital gains and franked distributions out, call it ‘Div 6E income’, and only assess beneficiaries on their proportionate share of this Div 6E income.”
So now a beneficiary gets assessed on capital gains and franked distributions through Subdiv 115-C and 207-B. Plus their Div 6E income.
Trust Income
If trust income and net income are the same, then you are done here. But trust income and net income very often are not the same. Usually, you have more net income than trust income. So what do you do with this excess of net income? You allocate it based on the trust income percentages.
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Disclaimer: Tax Talks does not provide financial or tax advice. All information on Tax Talks is of a general nature only and might no longer be up to date or correct. You should seek professional accredited tax and financial advice when considering whether the information is suitable to your or your client’s circumstances.
Last Updated on 22 September 2023
Tax Talks spoke to Robyn Jacobson - Senior Advocate at The Tax Institute - for more details.
