Colonial First State Investments decision illustrates difficulty in a unit trust qualifying as a fixed trust

The recent Federal Court decision of Colonial First State Investments Ltd v Commissioner of Taxation [2011] 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 section 272-5(2).

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.