20 Jan 11 Private ruling on tax consequences of unit trust redemptions considered - Colonial First State Investments
In a case that starkly illustrates the complexities of the interaction between Div 6 of ITAA 1936 and the CGT provisions of ITAA 1997, the Federal Court (Stone J) has, subject to one matter, dismissed the taxpayer's appeal against the Commissioner's objection decision on an adverse private ruling made by the Commissioner.
The taxpayer was the trustee of a retail unit trust investment fund (the Retail Fund) that held units in a related wholesale unit trust investment fund (the Wholesale Fund), the trustee of which was also the taxpayer. When unitholders in the Retail Fund requested redemption of their units, the taxpayer would at times redeem units it held in the Wholesale Fund. The application for the private ruling was made in the context of the taxpayer’s proposal to amend the trust deed of the Wholesale Fund to alleviate what it saw as unfairness in the tax burdens imposed on unitholders, arising from the fact that some unitholders held their units for more than 12 months and others held their units for less than 12 months.
The taxpayer's request for a private ruling posed 6 questions, all of which the Commissioner answered in the negative, adversely to the taxpayer. Subject to one minor matter, Stone J held that the Commissioner was correct in so answering. The reasons for the decision are complex and rely, in no small part, on the drafting of the proposed amendments to the Wholesale Fund's trust deed.
Of particular interest, however, is Stone J's finding that the Wholesale Trust was not a fixed trust under the trust loss provisions in Schedule 2F to the ITAA 1936 because of a provision in the trust deed of the Wholesale Trust which empowered unitholders to modify, repeal or replace the constitution of a unit trust by special resolution. This meant, in her Honour's view, that a unitholder's entitlement to a share of income or capital of the Wholesale Fund was not indefeasible.
Colonial First State Investments Limited v FCT  FCA 16 (Federal Court, Stone J, 18 January 2011).