Unit Trust


Which type of Unit Trust should I use - "fixed" or "non-fixed"?

To decide which type of unit trust to use, you need to understand the difference between the two types of unit trust.

What is the difference between a Unit Trust that is "fixed" and one that is "non-fixed"?

The differences between the two types of unit trust are:

  • the Unit Trust (Fixed) contains one class of ordinary unitholders, with the same rights to capital and income distributions of the trust in proportion to their unitholdings.
  • the Unit Trust (Non-Fixed) allows two classes of unitholders:
    1. ordinary unitholders, with rights to capital and income distributions of the trust in proportion to their unitholdings; and
    2. income unitholders who may, at the trustee's absolute discretion, receive distributions of income of the trust.

The trust is "non-fixed" because no unitholder or class of unitholders have a fixed (proportional) entitlement to income of the trust. This has important implications — for instance unitholders in the "non-fixed" unit trust cannot claim a tax deduction on borrowing costs associated with their unit holding.

More information?

For more information on:

  • the Unit Trust - fixed, see here
  • the Unit Trust - non-fixed, see here

If you are not sure which type of unit trust suits you, or your client, then you need to speak with your lawyer or accountant. We can arrange for you to speak with our lawyers at Maddocks, but this is not part of the free legal helpline, so the firm will charge you for its time.

Can a trust own units in a Cleardocs unit trust?

No (but see next 2 questions). A trust cannot own units in a unit trust because the law . says a trust is not a separate legal person. For example, the 'John Smith Family Trust' cannot own units or any other property.

Even so, the trustee of a trust, in his, her or its capacity as trustee, is capable of owning units and other property - see next question.

This answer is the same for a "Unit Trust - fixed" and a "Unit Trust - non-fixed".

Can a trustee own units in a Cleardocs unit trust?

Yes, a trustee can own units in a unit trust - as long as you include the trustee's name and their capacity. For example:

'John Smith in his capacity as the trustee of the John Smith Family Trust'.

In this case, the trustee holds the units in the unit trust on trust for the beneficiaries of the trustee's own trust.

(The trust itself cannot own units as it is not a legal entity.).

This answer is the same for a "Unit Trust - fixed" and a "Unit Trust - non-fixed".

Can a corporate trustee own units in a Cleardocs unit trust?

Yes a corporate trustee can own units in a unit trust - as long as you include the trustee's name and their capacity. For example:

'ABC Pty Ltd in its capacity as the trustee of the ABC Family Trust'.

In this case, the trustee holds the units in the unit trust on trust for the beneficiaries of the trustee's own trust.

(The trust itself cannot own units as it is not a legal entity.)

This answer is the same for a "Unit Trust - fixed" and a "Unit Trust - non-fixed".

Can additional units in a Cleardocs Unit Trust be issued in the future?

Unit Trust - fixed Yes, units in a Unit Trust - fixed may be issued in the future. This is the flexibility that a unit trust provides. Further units may be issued, and units may be sold or redeemed.

Unit Trust - non-fixed Yes, units in a Unit Trust - non-fixed may be issued in the future. This is the flexibility that a unit trust provides. Further ordinary units, and further income units, may be issued.

However, in a Unit Trust - non-fixed:

  • income units can not be sold. Instead, they can be redeemed - but only ever for a value of $1.00.
  • ordinary units may be sold.

For each type of trust, the deed sets out:

  1. The process for issuing more units or selling or redeeming units; and
  2. How to calculate the price for the relevant units.

How do I issue additional units in a Cleardocs Unit Trust?

The trustee has the power to create and issue additional units in a unit trust at any time.

An applicant for units in the Cleardocs Unit Trust must complete and lodge an application form as required by the trustee, and provide the application money or the transfer of property to be vested in the trustee.

The price paid for each issued unit can either be determined and agreed by all current unit holders, or it can be calculated under the mechanisms provided in the clause titled 'The redemption price of a unit' in the Cleardocs Unit Trust Deed.

If the trustee chooses to accept the application for units, the trustee must record the units allotted to the applicant in the unit register. A person has no rights to a unit until it is allotted and issued to him or her.

How do I dispose of units in a Cleardocs Unit Trust?

Redemption

A unit holder may apply to the trustee to redeem or ‘cash in’ one or more units by completing a form approved by the trustee. The trustee has absolute discretion whether to accept an application.

As the trustee in a Cleardocs Unit Trust Deed may determine a minimum number of units that each unit holder must hold, if redemption of an amount of units would result in the unit holder holding less than the minimum amount, the trustee may treat the application as being for all units held.

The redemption price is calculated under the mechanisms provided in the clause titled 'The redemption price of a unit' in the Cleardocs Unit Trust Deed.

To complete a redemption, the trustee must record the redemption in the unit register and cancel the returned unit certificate.

Transfer

A unit holder may transfer units to a third party with the trustee's consent, provided the units are first offered to other unit holders.

The trustee must set the price of the units offered, based on a formula in the clause titled 'Right to transfer units' in the Cleardocs Unit Trust Deed.

The transfer must be in a form approved by the trustee, and must be signed by both the transferor and the transferee. To complete a transfer, the trustee must:

  • register the transferee in the unit register;
  • cancel the transferor's unit certificate; and
  • issue a new certificate to the transferee.

Does a Cleardocs trust give me asset protection?

A trust can play an important role in an asset protection strategy, but unit trusts less so.

However, if you are concerned about asset protection, then you should seek legal advice concerning your own circumstances.

This answer is the same for a "Unit Trust - fixed" and a "Unit Trust - non-fixed".

When should the trustee apply for an ABN for the trust

ABNs are not compulsory. However, there are many good reasons to have one - for example, they help:

  1. You to deal with the ATO; and
  2. Help you in dealing with other businesses when supplying goods or services to them, or when purchasing goods and services.

Also, you need an ABN to register for GST. Entities carrying on an enterprise in Australia with a GST turnover of $75,000 must register for GST.

More information can be found at www.abr.gov.au.

This answer is the same for a "Unit Trust - fixed" and a "Unit Trust - non-fixed".

Will the trust be entitled to an ABN

A trust must meet either one of the following 2 criteria to be eligible for an ABN:

Criterion 1

The entity is any one of:

  1. A company incorporated under the Corporations Act 2001 in Australia;
  2. A charitable institution or trustee of a charitable fund in Australia;
  3. A deductible gift recipient in Australia; or
  4. A religious institution in Australia.

Criterion 2

The entity can answer 'Yes' to each of the following statements:

1. Its activity is carried out in any of:
1.1 the form of a business
1.2 the nature of trade, or
1.3 the form of a regular or continuous grant of a lease, licence or interest in property.
2. Its activity is carried out in Australia or it makes supplies that are connected with Australia.
3. Its activity is not a private recreational pursuit or hobby.

This answer is the same for a "Unit Trust - fixed" and a "Unit Trust - non-fixed".

What do I do if the unit trust deed is lost?

You can't simply replace a unit trust deed because to do so may create a new trust - which has tax and stamp duty implications.

So, if a discretionary trust deed has been lost, then you need to consider the following steps in consultation with a lawyer:

  1. Arrange for all parties to the deed to conduct a thorough search for the deed;
  2. Contact the person (maybe a solicitor or accountant, or their firm) who arranged the deed to see if they have a copy;
  3. Ask the person (maybe a solicitor or accountant, or their firm) who arranged the deed if they have a deed which they arranged around the same time as your lost deed was arranged;
  4. Seek advice from your lawyer as to whether you can use a similar deed to replace the lost Deed; and
  5. If none of the above options are available, then the trustee can approach the relevant state or territory court and apply for directions on how to administer the trust.

This answer is the same for a "Unit Trust - fixed" and a "Unit Trust - non-fixed".

I want to change the trustee of my unit trust from an individual to a corporate trustee. I have not yet incorporated the company to act as trustee. What do I do?

You can create a company through Cleardocs using the Company Registration package. Once you have registered the company it can be appointed as trustee of the trust. You will need to see a solicitor to draft a Deed of Appointment and Resignation. This document officially appoints the new company as trustee of your trust and records the outgoing individual trustee's resignation.

Maddocks can provide you with a quote to prepare these documents. Please call us to arrange a quote from Maddocks.

Does the Cleardocs Unit Trust help reduce land tax in NSW?

The Cleardocs interface:

  • for the "Unit Trust — fixed" allows you the option to order a deed that can be submitted to the NSW Office of State Revenue for classification as a fixed trust for the purposes of the Land Tax Management Act 1956 (NSW). This can help to reduce the land tax payable on any real estate the trust holds in NSW; and
  • for the "Unit Trust — non-fixed" does NOT allow that option — this is because it is not available under the law.

What do I need to do for the trust to be a fixed trust for NSW Land Tax purposes?

The Cleardocs system will ask you whether you want your unit trust to be a fixed trust for NSW Land Tax purposes. If you answer "Yes", then the trust deed will include the clauses that are drafted so that the trust qualifies as a fixed trust under the Land Tax Management Act 1955. These clauses have been reviewed and approved by the NSW Commissioner for State Revenue.

Warning: The Commissioner's policy in relation to fixed trusts is based on a number of factors, including cases that are decided by Courts and Tribunals from time to time. The Commissioner has approved the Cleardocs fixed unit trust deed and has advised Cleardocs (via Maddocks) that a private ruling classifying the trust as a fixed trust is not required. However, the Commissioner can change the policy in relation to fixed trusts at any time and if you do not obtain a private ruling, you cannot be sure that the trust will be eligible for the reduced rate of land tax. Therefore, you must consider applying for a private ruling to have confidence in your land tax position. The Cleardocs document package includes documents that can assist you with this application.

What if the Commissioner rules that my Unit Trust — fixed is not a fixed trust for NSW Land Tax purposes?

If your trust deed was from Cleardocs, then you should refer the matter to the Commissioner's Senior Technical Officer, Land Tax and ask for the ruling to be changed. If the Commissioner's ruling is not changed, call the Cleardocs help line on 1300 307 343. We will put you in touch with a lawyer from Maddocks who can advise you of your next steps.

If your trust deed is not from Cleardocs, then speak with your lawyer, or the lawyer who prepared your trust deed.

How is the "Unit Trust — fixed for NSW land tax purposes" different from other fixed unit trusts and what are the implications arising from this difference?

In a fixed unit trust, the unit holders are entitled to a share of the income and capital distributions of the trust in proportion to their unit holding. The trustee does not have discretion to pay one unit holder's entitlement to another unit holder or to a non-unit holder.

However, a typical fixed unit trust will provide the trustee with certain discretions, which must be exercised in the interests of the unit holders.

Section 3A(3B) of the Land Tax Management Act 1956 (NSW) provides that a fixed trust deed for NSW land tax purposes must specifically provide that the unit holders have:

  • a present entitlement to the income of the trust, subject only to the payment of property expenses relating to the administration of the trust; and
  • a present entitlement to the capital of the trust, and may require the trustee to wind up the trust and distribute the trust property or the net proceeds of the trust property.

The Commissioner has interpreted the present entitlement requirement to mean that the trustee must have few, or no, discretions. In particular, the Commissioner considers that the trustee:

  • must not be able to refuse a unit holder's request to redeem the unit holder's units. A discretion is generally common in unit trusts. Redeeming units may force the trustee to have to raise funds by borrowing or liquidating trust assets to pay for the redemption and to cover the costs of raising the funds. This may adversely affect the interests of other unit holders;
  • must not be able to refuse to register a transfer of a unit holder's units. A discretion to refuse redemption requests is generally common in unit trusts. The trustee can exercise this discretion to protect the interests of non-transferring unit holders who may not want to associate with the person to whom the transferring unit holder is selling their units;
  • must not be able to accumulate any income of the trust without the unit holders' prior consent or agreement. This places an additional administrative burden on a trustee, who will need to seek approval if the trustee considers that the accumulation of income is necessary in the interests of the trust.

Cleardocs customers should consider these restrictions before executing the Unit Trust — fixed for NSW land tax purposes or settling property into a fixed trust.