Information here may help you as a guide to provide general overview of
operation of a Fixed Unit trust and explain the commercial advantages and
disadvantages of conducting business or investing with a fixed unit trust
structure.
There are many tax planning, asset protection and distribution of wealth
issues which must be considered before a decision is made to establish a
fixed unit trust. Those who intend using this tax structure, information
contained herein should be taken as starting point of their investigation.
Many accounting and legal matters, such as, stamp duty and land tax, have not
been addressed here in detail. We are not in a position to advice you, trustees
and beneficiaries should read the trust deed to better understand their rights,
powers, obligations and duties. This guide is not intended to replace any legal
advice; we do not know if a fixed unit trust will suit your purpose, as we do
not know your purpose, readers should consult a qualified legal practitioner or
accountant for advice.
Click on the points below to read more information
A trust is established for (usually) un-related parties with a payment of an
amount, called “initial sum” by the initial unit holders to the trustee to be
held in trust in accordance with the deed for the benefit of the unit holders.
A fixed unit trust is a trust where the rights of the beneficiaries (unit
holders) to income and capital are fixed. This is in the sense that they are not
subject to any discretions on the part of a trustee, and are unitized, in the
sense that those rights are divided amongst the beneficiaries based on how many
units have been issued to them.
A fixed unit trust is where the unit holders, who are all predominantly
un-related members of two or more separate families getting together to hold an
asset together (usually a large property or shareholding) or run a business
together. The trustee has no discretion on which unit holder gets which
distribution portion of income or capital of the trust. All income and capital
is distributed according to unit holding.
The trustee owns the property of the trust and distributes each year; income of
the trust, to various unit holders with a common purpose. This common purpose
includes minimizing the total income tax, capital gain tax and asset protection.
No income of the trust can be accumulated in the trust. All income of the trust
must be distributed each year.
The trust runs for 80 years or earlier, this termination date is called “vesting
day”, when unit holders are entitled to the whole of the trust fund according to
their unit holding. Until that day, the trust assets are held by the trustee.
In a fixed unit trust all units have the same rights to income and capital
distribution and voting rights in a meeting.
There is another type of unit trust known as “Hybrid unit Trust” aka “Hybrid
Discretionary Trust” where there are various types of units or different classes
of units issued to unit holders. These different units have different rights to
income and capital distributions and voting rights. These rights are determined
at the time the units are issued or as otherwise agreed by the unit holders and
the trustee. In some cases, hybrid unit trusts give trustee’s discretions as to
distribution of income and capital of the fund to various classes of unit
holders.
This fixed unit trust can be terminated by the unit holders in a special
meeting. On termination, all assets are distributed to unit holders according to
the units held by them on termination date. Top
Trusts are created by a legal document called “trust deed” prepared by a
solicitor which outlines the purpose of the trust, the rights and obligations of
the trustees and unit holders, powers of the trustee, and identifies various
parties such as initial unit holders & Trustee(s).
For a trust to exist four elements must be present. These are:
a trustee;
a beneficiary, (called in the case of a unit trust, a “unit holder”);
trust property; and
an equitable obligation on the part of the trustee to hold the property for the benefit of the beneficiary.
Most Australian businesses are carried on in trusts. Trusts can be small, or
they can be very large: some of the managed investment unit trusts have more
than 20,000 unit holders or beneficiaries. Top
A unit is a piece of property that entitles the unit holder to a specified
proportion of the income and capital of the trust.
A unit held under a trust is different from a share in a company. A share
confers on the holder no legal or equitable interest in the assets of the
company; Units under the fixed trust deed confer a proprietary interest in all
the property which is subject to trust of a deed.
In other words, a unit in a fixed unit trust confers on the unit holder an
equitable interest in both the underlying capital and the income of the trust.
Top
Trustee is appointed by unit holders with powers contained in the trust deed.
Trustee owes a duty of care of “good faith” to the unit holders and the deed
requires that all trustee(s), at all times, act in best interests of all unit
holders.
Trustee may be held personally liable for debts incurred in their capacity as a
trustee but have the right to be indemnified out of the assets of the trust. A
trustee can resign if he / she so wishes by giving notice to all unit holders.
Trustee(s) are responsible to look after trust funds by investing & managing it
and distributing to various unit holders at the end of the financial year. They
must also maintain books of account and lodge relevant income tax returns with
the tax office. Top
Usually unit holders of the fixed unit trust incorporate a (new) company to act
as a trustee and nominate various unit holders as directors of the company.
Individual trustee(s) can also be unit holders, however, most advisors would
prefer a company as trustee of the trust and unit holders (who can also be
directors of the trustee company) are beneficiaries of the trust.
There is no rule that Individual trustees cannot also be unit holders, but since
trustee(s) are to be seen to act in the benefit of ALL unit holders, having one
or few Individual unit holders as trustee(s) may break that fiduciary duty of
trustee(s). Hence many advisors prefer a company to act as trustee.
Top
The unit holders as a group control the trust. This is because the trust deed
gives them the power to direct the trustee and if necessary, dismiss the trustee
and appoint another person to act as the trustee instead.
The deed specifies the percentage vote required for a resolution of a meeting of
unit holders to be effective. Usually it is 75% unless the unit holders decide
otherwise. Top
Besides fiduciary duty advantage as listed above, following are other benefits
of having a company as a trustee:
Assets of the trust are held in the name of trustee(s), if trustee is a
company then private assets of Individual trustees generally cannot be confused
as trust assets;
In case of death of individual trustee all assets of the trust have to be again transferred in the name of new individual trustee, however if a company is a trustee, there is no change of ownership of assets even in case of death of director of trustee company;
The directors of Trustee Company can be unit holders in their individual
capacity whilst still being in control of the trust.
The disadvantages of using a company as trustee are largely the extra cost of
setting up and running a company each year. Top
Trustee must act in “Good faith” whilst handling trust affairs, this means that
trustee must put interest of the trust ahead of his or her personal interest and
act in a manner a person would in dealing his or her own personal assets.
Below are some duties of trustees:
follow the trust deed;
hold assets of the trust and manage its investments;
engage experts for benefit of the trust;
delegate duties to a competent persons, however the trustee is still
responsible for delegated tasks;
invest trust’s assets in accordance with law and as per the trust deed;
to maintain proper books of accounts including minutes of meetings of the
trustees/directors of the trustee company, lodge returns with ATO; and
to keep the trust’s assets separate from other personal assets. Top
Fixed Unit trusts structure has many advantages over other tax structures like,
partnership, company etc, however it has its own limitations. Below is a list of
advantages, please note that this list is not exhaustive, you must seek your own
independent legal and accounting advice.
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, e g, trust income of $10,000 is earned in financial year ended 30th
June 2000 and distributed to the beneficiary on 15th August 2001, this income
has to be included in the beneficiaries income tax return for the financial year
ended 30th June 2000 and not 2001.
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 and low income rebates.
If unit holder is a company the company will pay tax at company tax rate (at
the time of writing 30%).
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. Top
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
Top
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. The trustee can then invest that money on behalf of
the unit holder as per powers given to them by the trust deed.
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. The trustee may
apply money held for minor unit holder in payment of education, clothing and
other similar expenses which are for maintenance, education or benefit of minor
beneficiary. Alternatively, trustees can distribute minor’s money, to their
parent or guardian. Top
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. Top
Disadvantage of operating with a fixed unit trust structure is that
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. Hence, when a trust incurs a loss beneficiaries are not able to offset
that loss against any other assessable income that they may derive from other
sources such as salary, interest, dividend etc.
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. This means, that all income
of the trust cannot be accumulated and has to be distributed to unit holders
even in a financial year when a unit holder has high taxable income. A fixed
unit trust cannot accumulate income and pay tax in its own right. Top
The trustee is the legal owner of trust’s property. This means that trustee’s
name should appear on all ownership documents, such as shares, managed funds,
property etc. However, this ownership of asset is not in their “own benefit”,
but as a beneficial owner, on behalf of the trust.
Hence, wherever applicable, assets ownership documents should carry the tag
“ In Trust For”, or ITF or “As Trustee For” ATF, e. g the owner of the trusts
share can be either “Mr R Smith ITF Smith Family Trust” , in case of individual
trustee or “R Smith Pty Ltd ATF Smith Family Trust” in case of company trustee.
In some instances, above name cannot be inserted in the ownership documents, as
most land title offices do not recognise a trust and will only register title of
property in the name of the trustee only, who will be the legal owner of the
property. The land titles will not allow the above tag.
In these circumstances, property has to be registered in the name of Individual
Trustee or company trustee wherever relevant. Some advisors recommend drawing up
a separate “declaration of trust” deed for each such asset. Top
After 80 years of creation date, or earlier, if the trustee decides, the trust
will “vest” or cease. The trustee will on “vesting date”, put together all the
trust’s property, its capital and distribute to all unit holders
(beneficiaries).
In a Fixed unit trust, the unit holders also have a right to terminate the trust
and may request the trustee to wind up the trust and distribute the trust’s
property to all unit holders. Top
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