Monday, January 31, 2011

'Colonial' decision released

Earlier in the month the long awaited 'Colonial' decision was released by the Federal Court.

Although, unlike other tax cases last year (such as Bamford and Thomas), the taxpayer was largely unsuccessful, the Colonial decision again reinforces that the provisions of the trust deed are critical.

For those interested the full title of the case is 'Colonial First State Investments Limited v Commissioner of Taxation [2011] FCA 16' (Federal Court of Australia, Stone J, 18 January 2011).

In brief terms, the key aspects of the decision were as follows:

1. The main interest in the decision will be for the Australian funds management industry as it focussed on the tax effect of provisions in a unit trust that sought to allocate part of the taxable income to a unitholder redeeming units.

2. The tests that must be satisfied to meet the definition of a 'fixed trust' for tax purposes will be difficult for many unit trusts. Here the unit trust was held not to constitute a fixed trust, primarily due to the wide amendment power that allowed changes to be made to unitholders' entitlements. The ability to satisfy the Tax Act definition of fixed trust is important in a number of areas including -


(a) to carry forward tax losses;
(b) passing through franking credits to unit holders; and
(c) where superannuation funds are unitholders, avoiding application of the ‘non-arm’s length income’ rules (note that prior to 1 July 2007, these rules were called ‘special income’).

3. The attempt by way of variation to provide the trustee the discretion to allocate discounted and non-discounted capital gains to unitholders on redemption was ineffective.

As set out in the post on 17 December 2010, it has been confirmed that there will be a full review of the way in which trusts are taxed.


The Colonial decision further highlights the need for a comprehensive review of the existing rules and Stone J mentions the need for legislative change in this regard.

A number of commentators also believe the proposed managed investment trust attribution regime (due to take effect on 1 July 2011) may address many of the concerns raised in Colonial.
Until next week.