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Unit & Fixed Unit Trusts
A unit trust is as trust in which the trust property is divided into a number of defined shares called units. The beneficiaries subscribe for the units in much the same way as shareholders in a company subscribe for shares.
In an ordinary unit trust, a beneficiary (or unit holder) is entitled to the income and capital of the trust in proportion to the number of units held. Like a company, it is possible for a unit trust to have different types of units with different rights attached.
Unlike a beneficiary of a discretionary trust, who has no proprietary interest in the property of the discretionary trust, a unit holder in a unit trust may have a proprietary interest in that property, generally being a relevant proportion of all the property of the unit trust, although this will depend on the terms of the trust deed. Refer to Charies V FCT (1954) 90 CLR 598 and CPT Custodian Pty Ltd v Commissioner of State Revenue (2005) HCA 53.
However, for CGT purposes, a unit is a CGT asset so that when a unit is sold it is the unit that is the relevant CGT asset, rather than any interest the unitholder might have in the underlying property of the unit trust. Refer TD 2000/32.
- Easy to introduce new equity partners – no value shifting rules
- Less regulations than a company
- When non-related parties are in trust together interests are fixed
- 50% discount method for work out CGT is available
- The small business concessions can be accessed.
- Simple to wind up
- Asset protection available through correctly drafted trust deed
- No regulator
- Substantiation rules less onerous than those imposed on individuals
- Flow through of small business concessions reduced by cost base adjustments
- If trust is funded by debt rather than equity, disposal of units can lead to large capital gains
- A change in unit holding can make pre-CGT assets to post-CGT assets
- May not be able to elect to be a family trust
- Losses are trapped in the structure
- The complex trust loss provisions apply
- Cannot transfer losses to other controlled entities like companies
- Clients can have trouble understanding all terms of deed
- More costly than sole trader and/or company
- Beneficiaries can be subject to complex PAYG calculations
- Varying the terms or objects of the trust can amount to a resettlement and have CGT and stamp duty consequences
Fixed Unit Trust
Although the unit holders of a unit trust may assume they have a fixed interest to the income and capital of the trust, the trust will really only be considered a “fixed trust” for purposes of the trust loss rules in Schedule 2F of the ITAA 1936 if it can be shown that:
Persons (i.e. individuals, companies, trusts, etc.) have fixed entitlements to all of the income and capital of the trust; and
The trust deed contains a clause that states that units can only be redeemed or issued for a price determined on the basis of the net asset value, according to Australian accounting principles, of the unit trust at the time of redemption or issue (refer S.272-5 of Schedule 2F).
If the trust deed allows for other methods of valuing new units or the redemption of units then the trusts, even if it is a unit trust with no discretionary elements, will be a “non-fixed trust” for the purposes of the trust loss rules. Such a trust will need to satisfy more tests than a fixed trust if it is to carry forward its losses.
a) Income tax advantages
- Net income in a financial year is distributed amongst unit holders. This distribution has to be included in the unit holders’ income in the financial year when the trust has earned the income and not the year when the income is distributed
- The classification of trust income, for example, dividend income, foreign income, or capital gain continues to be recognized under the same classification in the individual unit holder’s income tax return and any imputation credit or foreign tax credits follows through to the unit holder as per trustee’s distribution
- If unit holders are under 18 years of age, by any income distribution to them, trustees can avail their tax free threshold
- The trustee of a fixed unit trust must distribute all income of the trust and cannot accumulate income of the trust
- Only net income of the trust has to be distributed, a trust can also contribute superannuation for all unit holders in proportion to their unit holding, which means that tax on income of the trust can be limited to tax rate on contribution to a superannuation fund, which at the time of writing is 15%
- If the fixed unit trust has a loss and has received imputation credits in the financial year, the trustee can lodge its own income tax return and carry forward the loss to the next financial year and claim a refund of imputation credits
- If units are owned via family trusts – various income tax, asset protection and estate planning advantages connected to family trusts are also available to unit holders
b) Capital gains tax advantages
- On disposal of any asset of the trust, all unit holders are entitled to a 50% discount factor on capital gains, if assets are disposed after one year, this discount flows throw to unit holders’ on distribution of capital income
c) Asset Protection Advantages
- Any distribution to a unit holder need not be physically paid to them. If the unit holders agree, trustee can retain money which it has decided to distribute to unit holders and establish a bare trust for that unit holder within the fixed unit trust
- Money’s belonging to unit holders who are under a legal disability, like minors; distribution money from a fixed unit trust, can be held by the trustee, under a bare trust arrangement, till they reach 18 years of age
d) Land Tax
- This fixed unit trust is treated as a “fixed unit trust” within the scope of Land Tax legislation in many states. What this means is that this fixed trust will receive threshold available to trustees who own land under this trust deed structure
- For example Section 3A Land Tax Management Act 1956 of NSW states a trust is a “fixed trust” if equitable estate in all of the land that is the subject of the trust is owned by a person or persons who are owners of the land for land tax purposes and equitable interest of the trustee as trustee of the trust is to be disregarded. That means that the persons who are beneficiaries of the trust (unit holders) under the trust deed are taken to be the owners of an equitable estate in the land that is subject to the trust.
- This equitable interest is created because this trust deed specifically provides that the beneficiaries of the trust are presently entitled to the income of the trust and capital of the trust and can require the trustee to wind up the trust and distribute the trust property to the unit holders
- This trust cannot distribute capital or revenue losses to its beneficiaries. Which means that any losses have to be carried forward till a profit is achieved. As a result, should a trust incur a net loss, its beneficiaries, may be wise to have debt held at the unit holder level, rather than at the trust level, to avoid negative gearing type losses being locked up in the trust
- In a Fixed Unit Trust there is no discretion with the trustee as all income of the trust has to be distributed to the unit holders
If you would like more information on trust structures and want to learn more about the most appropriate type of trust or trusts for your situation, please click here to submit an online enquiry form or call us on 1300 QUINNS (1300 784 667) or on +61 2 9223 9166 to arrange an appointment.
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The Quinn Group operates Quinn Consultants, Quinn Lawyers, Quinn Financial Planning and Quinn Financial Solutions. The Quinn Group provides related information in regard to legal, accounting and financial planning issues. Liability limited by a scheme approved under Professional Standards Legislation* *other than for the acts or omissions of financial services licensees.