Last Man Standing Issue

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19 January 2011 – Following the release of the Federal Courts judgment in Colonial First State Investments Limited v Commissioner of Taxation, (“Colonial First State case”) Trustees and investors can gain further understanding around the taxation treatment of trust distributions and the limitations of the trust deed.

In the Colonial First State case, the Court held that a “last man standing” (or distribution) clause was ineffective for tax purposes as a means of allocating tax liability to redeeming investors throughout the tax year. “Last man standing” clauses are generally intended to equalise the tax exposure for both redeeming and continuing unitholders over the life of a trust and prevent continuing unitholders bearing a disproportionate share of the trust’s tax liability.

Trustees and Managers must be cautious going forward to ensure that trust distributions reflect an allocation of the trust’s taxable income and that any existing “last man standing” type clauses are reviewed.

Industry bodies are currently lobbying the Australian Government to address these trust issues (redemptions and “last man standing” inequalities) through changes to the tax law. Whether and how the Government intends to address these issues remains unclear, however, it is expected that such changes could be done either by broadening the MIT regime or otherwise introducing new legislation.

Further updates will be posted on these issues as they come to light.

A copy of the Colonial First State decision is available at