In this edition of 'It depends', lawyer Steven Cawood talks about the difference between unit trusts and fixed trusts, when you might need a fixed unit trust and when you can amend a trust to make it a fixed trust.
Steven, along with Sacha Robinson and Nathan Rutherford, will be covering this topic in more detail during their session 'Trust deed update – how to know ...', at our Annual Adviser Conference on 21 and 22 March. Register now to attend live at Sofitel Brisbane or virtually.
Video transcript
Welcome to this instalment of It Depends. At our upcoming Adviser Conference on the 21st and 22nd of March, Nathan Rutherford, Sasha Robinson and myself will be talking about how to know when to update a trust deed. Today, and in more detail at the Adviser Conference, I'll be discussing the difference between unit trusts and fixed trusts, when you need a fixed trust and when you can amend your deed to make it a fixed trust.
What is a unit trust and what is a fixed trust?
We have found that a number of our clients and advisers believe that all unit trusts are fixed unit trusts as defined in schedule 2F of the 1936 Tax Act. However, this is just not the case. A unit trust is a legal structure whereby the trustee holds assets on trust for the unit holders. The unit holders are entitled to the income and capital of the trust in proportion to the number of units they hold in the unit trust. A fixed trust is typically a unit trust that has been set up to comply with the restrictions in the 1936 Tax Act. This means it includes additional restrictions on how the trustee can deal with the unit trust. For example, the trustee can only issue units to the existing unit holders in proportion to their existing unit holder percentages, unless they all agree. Other restrictions include the ability of the trustee to amend the trust deed without the consent of all unit holders and also includes some specific provisions around the redemption of units. If a unit trust doesn't have these restrictions, the chances are it's what we would call a standard unit trust. In addition to fixed trust for tax purposes, we also have fixed trusts for New South Wales land tax purposes. These include specific references to the relevant New South Wales legislation. However, as fixed trusts include a number of limitations, they should only be used when necessary.
Why might I need a fixed unit trust?
Firstly, clients may need a fixed trust for tax purposes if they intend to purchase shares in a company. This is because to pass on franking credits to the individual unit holders, the trust must either be a fixed trust or they'll need to make a family trust election. Secondly, if the trust is going to incur losses, it would be much easier to satisfy the carry forward trust loss income rules if it is a fixed trust. Thirdly, if the trust is going to acquire land in New South Wales, the clients may want it to be a fixed trust for New South Wales land tax purposes. This is because it will allow the individual unit holders to be assessed for land tax rather than the trust as a whole, which might entitle each unit holder to access the land tax threshold. Importantly, not all fixed trusts for tax purposes will satisfy the requirements of the New South Wales legislation to be a fixed trust for New South Wales land tax. This is because it doesn't make the references to the specific pieces of legislation. Finally, if any unit holders are superannuation funds, it should be a fixed unit trust so that any income is not automatically treated as 'non arm's length income' under the relevant Tax Acts.
Can you amend the trust deed to make a unit trust a fixed trust?
Well, as always, it depends. As with any trust work, the most important thing is to read the deed. In particular, the variation power. Some trust deeds include a very broad variation power that allows us to vary any trusts, powers and provisions. However, others are much narrower and include express limitations on what amendments can be made to the terms of the trust. Our amendments are aimed at reducing the risk of unit holders ceasing to have fixed entitlement to the income and capital of the trust, and include some overriding provisions to make sure that the trustee only exercises its powers to further that purpose. Generally, where a trust has a broad variation power, we do not believe that making the amendments to make the trust a fixed unit trust will cause a resettlement based on the general trust principles that have been set out in the case and the ATO's tax determinations. However, it is important to remember that this will be dealt with on a case by case basis and will not always be the case.
Thank you for listening to this edition of It Depends. If you have any questions regarding fixed trusts, unit trusts or trusts more generally, please let us know and we'll be happy to assist.
Cooper Grace Ward is a leading Australian law firm based in Brisbane.
This publication is for information only and is not legal advice. You should obtain advice that is specific to your circumstances and not rely on this publication as legal advice. If there are any issues you would like us to advise you on arising from this publication, please contact Cooper Grace Ward Lawyers.
