The recent Federal Court decision of Colonial First State
Investments Ltd v Commissioner of Taxation  FCA 16
further highlights the danger of assuming that unit trusts will
qualify as "fixed" trusts.
In Colonial, the court found that a large unit trust
managed by Colonial First State was not a fixed trust because the
trust deed allowed the trust deed to be amended with the approval
of a special resolution (in this case 75% of unit holders).
The court effectively decided that, if a unit holder's
interest could be reduced or detrimentally affected as a result of
a special resolution of unit holders or other actions of the
trustee, the unit holder did not have a "vested and
indefeasible interest" as required by section 272-5 (schedule
2F- 1936 Tax Act).
The court also confirmed that the deed should require that the
value of units is determined according to Australian accounting
principles if clients want to take advantage of the exception in
Most private unit trust deeds still provide that the deed can be
amended by a majority or special resolution and therefore will not
qualify as a fixed trust. Many trust deeds also contain other
provisions that will prevent them qualifying as fixed trusts (for
example, if there are special class units or the trustee has power
to make gifts).
These trust deeds need to be amended if it is important that
they qualify as fixed trusts.
We have previously published an alert on the importance of a
superannuation fund having a 'fixed entitlement' to the
income and capital of a unit trust (
read this alert).
Income received by a superannuation fund from a non-fixed trust
will be "non-arm's length income", which will be
taxed at the top marginal rate.
It will also be important that a unit trust qualifies as a fixed
trust in a number of other situations. For example, if a unit trust
receives franked dividends it will only be able to pass on the
franking credits if it is a fixed trust or makes a family trust
election. Most unit trusts have multiple unit holders and cannot
make a family trust election, so it will be critical they qualify
as fixed trusts.
Cooper Grace Ward was named Best Australian Law Firm in the BRW
Client Choice Awards 2010 - Revenue < $50m. Joint Best
Australian Law Firm in the BRW Client Choice Awards 2009 - Revenue
The firm has also been named as the fastest growing law firm in
Australia for 2009 by The Australian.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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