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30 Jun 11 Tax consequences of unit trust redemptions – Decision Impact Statement on Colonial First State Investments

The ATO has issued a Decision Impact Statement on the Federal Court decision in Colonial First State Investments Limited v FCT [2011] FCA 16; 2011 ATC 20-235.

This case concerned the tax treatment of payments made by the trustee of a unit trust on the redemption of units; in particular whether redeeming unitholders would be assessed on trust capital gains apportioned to them.

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 trust deed.

In its statement, the ATO addresses each of the various issues raised in the decision.

On the question of present entitlement, the ATO notes that Taxation Rulings IT 328 and IT 329 indicate that the Commissioner accepts that a payment or application of income within two months of the close of an income year can give rise to a present entitlement to income as at year end. However, the decision in this case now makes it clear that the administrative practice is unsustainable in any case. If a beneficiary were to take the point that a resolution made after the end of the income year could not operate to confer a present entitlement by the end of an income year, the Commissioner might be obliged to concede any assessment based on it.

Accordingly the Commissioner intends to withdraw these rulings. However, in recognition that this advice has come so late in the 2010-11 income year, these rulings will not be withdrawn until after 31 August 2011.

Law Administration Practice Statement PS LA 2000/2 relieves certain trustees from the obligation to lodge income tax returns. This dispensation does not however mean that trusts to which the practice statement applies are ignored for all tax purposes. That is, it is not intended that Division 6 should be disregarded in working out the income tax consequences for the beneficiary (eg, tax losses made by the trustee cannot be claimed directly by beneficiaries).

The ATO will consider amending the practice statement to make it clear that the lodgment exemption does not exempt a trustee from its responsibilities under Division 6.