Unit Trust Deed

  • Unit Trust Deed

  • $445 incl. GST

  • A Unit Trust deed sets out the Unit Trust rules. It is the Unit Trust’s rule book.

    Commonly, a Unit Trust either holds assets or runs a business: never both.

    A Unit Trust apportions trust assets according to ‘units’. As a Unit Holder, you get beneficial ownership of trust property according to the number of units you own.

What is a Unit Trust deed?

A Unit Trust deed sets out the Unit Trust rules. It is the Unit Trust’s rule book.

Commonly, a Unit Trust either holds assets or runs a business: never both.

A Unit Trust apportions trust assets according to ‘units’. As a Unit Holder, you get beneficial ownership of trust property according to the number of units you own.

For example, you have 150 units and I have 50 units. Therefore, you own 75% of the Unit Trust assets. I own 25% of the assets in the Unit Trust.

An Australian Unit Trust is a cross between a Family Discretionary Trust and a company. In a Family Discretionary Trust, the Trustee holds the assets for the Beneficiary. So too, the Unit Trusts’ Trustee holds the assets for the benefit of the Unit Holders.Unit Trust v company

 

Company vs Unit Trust

Australian Unit Trusts are similar to companies. Unit Trusts have Unit Holders like companies have shareholders. Unit Holders hold units in Unit Trusts like shareholders hold shares in companies. Units are capable of fluctuating in value, like shares. The High Court of Australia demonstrates the benefits of Unit Trusts over companies. See Charles v Federal Commissioner of Taxation (1954) 90 CLR 598. This is because, in a company, a shareholder has no interest in company assets. In contrast, a Unit Holder has a proprietary interest in the trust assets. This is in exact proportion to the Units that you hold.

Tax Advantages of a Legal Consolidated Australian Unit Trust

In the company, there is a fixed tax rate. It is a constant tax rate. In contrast, the Unit Trust’s Unit Holders pay tax on the profit at the Unit Holder’s personal tax rate – which may be zero. In other words, the company pays tax on income. In a Unit Trust, the Unit Holders generally pay the tax.

Company:

Each financial year the company pays tax on its profit. The tax paid attracts an ‘imputation credit’. The company may retain this profit. The company does not have to pay the profit to the shareholders. The company does not have to declare a dividend.

At some point in the future, it can pay that profit to the shareholder. This is called a dividend. Only at that time does the shareholder have to pay tax on the dividend. The paying of a dividend is income in the hands of the shareholder. But the shareholder can use the imputation credit to reduce the tax it would otherwise have to pay. For example, let’s say the company has already paid tax on the income at a tax rate of 25%. It then distributes that income to the shareholder. If the shareholder’s marginal tax rate is 45% then the shareholder only pays an additional 20% tax on the dividend.

Unit Trust:

in contrast, a Unit Trust has to distribute all of its income to the Unit Holders at the end of each financial year. (Any income not distributed is taxed automatically at the highest marginal tax rate.) The Unit Holders then pay tax at their personal marginal tax rate.

If the Unit Holder does not earn much income that financial year then the tax on the Unit Trust income may be zero. But if the Unit Holder earns a lot of money that financial year then its tax rate may be far higher than the fixed (constant) company tax rate. This is why often you hold the Units in a Family Trust: rather than in your own name.

The advantage of a company is that you can retain the income at a constant tax rate and not distribute to the shareholders. The shareholder’s tax rate may be much higher than the company tax rate. This sounds good, except that it is difficult to use the money in the company for personal use. The company assets and profit are ‘trapped’ in the company. But you did temporarily save (or rather defer) the higher tax rate.

In contrast, each financial year the Unit Holder pays tax on the income it derives from the Unit Trust. (The Unit Trust is therefore not taxed directly.) Our Unit Trust deed allows you to reinvest the income back into the Unit Trust. But the Unit Holder must still pay tax on the income first. What the Unit Holder then does with the money is up to the Unit Holder. If the Unit Holder wishes to put the after-tax dollars back into the Unit Trust then it may do so.

Family Discretionary Trust vs Unit Trust

Unit Trusts and Family Trusts do different things.

Unit Trusts have ‘negotiability’: you can sell and buy units, and fixed annual entitlements to income and capital gains. The Unit Holders of Unit Trusts get 100% of their entitlement. The trustee has no discretion to vary your entitlement.

In contrast, Family Trusts are discretionary. This means that there are no fixed entitlements for the children. Mum and Dad (as the Appointors) direct the Trustee of the Family Trust to distribute income. This is generally to the lowest income earners in the family for the purposes of reducing tax.

Unit Trusts are not a substitute for Family Trusts. Both types of trusts are often used together. For example, a Family Trust often holds units in a Unit Trust.

Family Trusts work for one family. Unit Trusts are appropriate for two or more families – joint ventures, businesses or partnerships in the managing of assets. Instead, if you control assets in a single-family, consider building one of our comprehensive Family Trust Deeds.

Unit Trust vs partnership of family trustsUnit trust vs company vs family trust

A company and a family trust are usually inferior to a Unit Trust. The greatest competition to a Unit Trust is a Partnership of Family Trusts. See here.

Why a Unit Trust from Legal Consolidated Barristers and Solicitors?

We review Unit Trusts going insolvent. Often the Unit Holders are liable to pay for the shortfall of assets. This is when the Unit Trust goes broke.

Unit Holders in a Unit Trust are liable to indemnify the trustees of a Unit Trust. This is for any liabilities incurred throughout the conduct of the Unit Trust business. See Justice McGarvie in Broomhead Pty Ltd (in Liquidation) v Broomhead Pty Ltd (1985) VR 891.

However, this rule does not apply if the right to indemnity is expressly revoked from the Unit Trust deed. Our Unit Trust deed protects unitholders from liability incurred by trustees. Our Unit Trusts deed benefits the unitholders.

Common faults of Unit Trust deeds

Be careful of who drafts your Unit Trust deed. Common faults:

  • Majority of the Unit Holders controlling 100% of the Trust assets
  • The Unit Trust not complying with the Australian Tax Office lending guideline
  • The Unitholders are personally liable for the Trust debts. This is under Broomhead Pty Ltd (in Liquidation) v Broomhead Pty Ltd (1985) VR 891
  • An implied relationship between unitholders – they, therefore, become jointly and severally liable for each others’ debts
  • The trustee pays tax on the trust income at the highest marginal tax rate. This is under section 99 Income Tax Assessment Act 1936 (Cth)

Can the value of the units change over time?

The value of the Units can change over time. Today you issue Units for $1.00 each. If your business goes well or the value of the assets increase then a unitholder may sell his Units for say $5.00 each. Or the trustee of the Unit Trust may issue new Units at a higher price to people wishing to inject money into the Unit Trust. That is a decision for the unitholders.

Can I update the Unit Trust deed?

While Family Trusts deeds and Self-Managed Superannuation fund deeds are updated on average every 5 – 8 years, Unit Trust Deeds do not usually need updating to deal with tax and trust matters. But of course, you can update a Unit Trust, as often as you wish, if all the unitholders agree.

Want to formalise the relationship between the unitholders? Build a Unitholders Agreement.

Unitholders may debate on what the Unit Trust will do and invest in. But this is not a matter of the Unit Trust deed or a Unitholders Agreement. This is much like a company and shareholders agreement. When shareholders debate on how to run the business they do not usually update the company Constitution or the Shareholders Agreement.

Two most misunderstood Unit Trust questions:

  1. Is there a limit on the number of Unit Holders?
  2. Can a Unit Trust last forever?

1. Limit on the number of Unit Holders?

The Government does not want you to have too many members of the public involved in a Trust. Therefore, the Government regulates the number of Unit Holders. A Unit Trust is classified as a Public Unit Trust. This is if there are 50 or more Unit Holders: s 102P(1)(c) Income Tax Assessment Act (1936).

Unit Trusts lasting 80 years with many unit holders

Sure, have lots of Unit Holders. But more than 50 means you become a Public Unit Trust.

For example, the Australian Medical Unit Trust has 500 Units. It gives Units to 52 separate people. In this example, the Trust is a Public Unit Trust as it has more than 50 Unit Holders.

Becoming a Public Trust allows you to have an unlimited number of Unit Holders. But it increases administration and taxation. Your Trust is potentially taxed as a company.

A Public Unit Trust is avoidable if 20 or fewer Unit Holders own 75% of the units.

In this example, the Australian Medical Unit Trust has 500 Units. When they sell these Units they sell 375 of them to 18 Unitholders. The remaining 125 is distributed amongst the other 42 Unit Holders. This means that the first 18 Unit Holders own 75% of the overall units (375/500 = 75%).

Is your Unit Trust a Managed Investment Scheme?

Do you have more than 20 Unit Holders? Under the Corporations Act (2001) are liable for $22,000 and five years’ imprisonment. This is if your Unit Trust is a Managed Investment Scheme (MIS) – and you don’t register it. In an MIS the investments are pooled together to produce a beneficial interest for the Unit Holders.

How does a Unit Trust turn into an MIS?

  1. You need 20 or more Unit Holders, and
  2. The Unit Holders don’t have the day-to-day management of the Unit Trust.
Day-to-day Management

Your Unit Trust is NOT an MIS if your Unit Holders have control of the day-to-day operations of the Trust. However, what if your Unit Holders only share in the profit? Then your Unit Trust is an MIS. If you have more than 20 Unit Holders, you are required to register your MIS. Failure results in penalties.

If you have more than 20 Unit Holders, you are required to register your MIS. Failure results in penalties. Registration as an MIS is with ASIC. It may require a Product Disclosure Statement and other formalities.

ATO’s view on when a unit trust is taxed like a company

The ATO in 2017 released a Decision Impact Statement (DIS) on the High Court decision in ElecNet (Aust) Pty Ltd (as trustee for the Electrical Industry Severance Scheme) v FCT [2016] HCA 51.

In its decision, the High Court unanimously dismissed the taxpayer’s appeal and confirmed that the Electrical Industry Severance Scheme (EISS) was not a “unit trust” within the meaning of Div 6C of Pt III ITAA 1936. It was, therefore, not entitled to be taxed like a company.

It did so on the basis of finding that the interests of the electrical industry workers in the scheme could not be characterised as “units”. In arriving at its decision, the High Court also indicated that the workers’ interests were “discretionary” in nature. This is contrary to the concept of a fixed “unit” interest.

ATO view on taxing a Unit Trust like a company

The ATO considers that the High Court’s decision is consistent with its view of the law. (I am sure that the High Court of Australia takes great solace that the gathering of bureaucrats running the ATO agrees with the Court.)

The issue before the Court was whether the severance scheme was a unit trust. This is under Div 6C of Pt III ITAA 1936. The Court held that the rights conferred on employees by the Deed did not support the conclusion that the EISS was a unit trust for the purposes of Div 6C.

But why? The ATO said that the Court considered:

  1. the effect of the terms of the Deed; and
  2. the construction of the terms of the provisions of Div 6C. This is looking at the text, context and purpose.

The Court found that there was no reason in the text or context of Div 6C to attribute to the undefined expression “unit trust” any meaning. This is other than the meaning from the language of Div 6C

The ATO also notes the High Court’s concern. This is the unattractive consequence that severance payments made to workers under the scheme are taxable. This is in the hands of the recipients as unit trust dividends.

Summary ElecNet case:

  1. There is no limit on the number of Unit Holders in a Unit Trust.
  2. If your Unit Trust has more than 20 Unit Holders it may need to be registered as a Managed Investment Scheme.
  3. If your Trust has 50 or more Unit Holders it is a Public Unit Trust. You escape this if 75% of the units are owned by 20 or fewer Unit Holders. 

2. Can a Unit Trust last forever?

Like all good things, Unit Trusts have to come to an end. They end no later than the ‘vesting day’. On vesting the assets transfer to the Unit Holders.

On vesting two taxes apply:

  1. Capital Gains Tax (CGT) (Federal Tax)
  2. Transfer (Stamp) Duty (State Tax)

Some Unit Trusts 6 figures in CGT and transfer duty. Therefore, Unit Trusts try to defer this liability by making the Trust exist longer.

Unit Trusts lasting 80 years

While you can’t live forever – perhaps your Unit Trust can.

Unit Trusts lasting 80 years?

The Government does not want assets tied up in Trusts indefinitely. The Government seeks to prevent assets from falling into disrepair. A Trust can not go on longer than 80 years. This is called the Rule Against Perpetuity.

This Rule comes from English law. The 22nd Earl of Arundel in 1682, wanted to control how his titles pass for thousands of years. The Courts refused to grant an indefinite Trust. The Court limited the life of the Trust.

The 80-year Rule applies in all Australian States except one. South Australia has not adopted a Rule Against Perpetuities. Here, you do not need to have a Unit Trusts lasting 80 years. They can exist indefinitely.

Don’t the Westfield Unit Trust’s go forever?

There are two Westfield Trusts:

  • Westfield Trust; and
  • Westfield American Trust.

They are both Unit Trusts. The Unit Trusts are governed by New South Wales law.

Collectively they are worth AUS$58 Billion. Surely they can’t be subject to the 80-year period? Because the Trusts are governed by New South Wales they are subject to the Rule Against Perpetuities. Both Unit Trusts suffer the 80-year rule. The Westfield Unit Trust started in 1982. The Westfield American Unt Trust started in 1996. Both terminate on their respective 80th anniversary.

Want your Unit Trust to last longer than 80 years?

Under South Australian law, a Unit Trust can potentially exist indefinitely. When building a Trust Deed on Legal Consolidated put in a South Australian address for the Trustee. If you have no such address then put in: Care of General Post Office Adelaide, 141 King William Street, Adelaide SA 5000.

Example: The Australian Medical Unit Trust is located in Brisbane. There is concern that Unit Trusts lasting 80 years is not long enough to fulfil the Trust’s purpose. When they sign the Trust Deed they elect to have South Australia’s laws apply to their Trust. Now the Trust can exist indefinitely?

South Australia: Blessing or curse?

Although South Australia may seem like a blessing, it could end up more like a curse. Here are the few issues you should be aware of if you don’t want your Unit Trust lasting 80 years.

Example: The Australian Medical Unit Trust has operated for 80 years. The Trust is able to live on indefinitely. However, any Unit Holder can direct the Trustee to wind up the Trust.

In practice, choosing South Australia’s laws has little value. It’s usually more trouble than its worth. Any legal issues that arise are dealt with in South Australian Courts. You have to travel to South Australia and brief lawyers in that State. This is inconvenient and costly.

What would the Court say?

If you do make it to 80 years with no problems the Court may order the Trust to wind up anyway. There is no guarantee that a court gives effect to your choice of law: Akai Pty Ltd v The People’s Insurance Co Ltd (1996) 188 CLR 418.

This is especially when the Trust has chosen South Australia to avoid the laws that otherwise apply.  Instead, they apply the State’s laws that have a close and real connection to the Trust.

Over the years we have set up many Trusts governed by the laws of South Australia. This escapes the Unit Trusts lasting 80 years rule. To date, we have not had an attack by the ATO regarding those Trusts.

Would the ATO argue that the choice of law was a breach of Part IVA Income Assessment Act (1936)? Part IVA is the general anti-avoidance provision. If you do something contrived primarily to reduce tax then the ATO disregards what you do and inflicts the tax you should pay.

Legal Consolidated’s view is that Part IVA is difficult for the ATO to sustain. There is no ‘scheme’ or convoluted array of activities. However, it is a threat.

Is South Australian Unit Trust right choice for you?

Before choosing South Australia’s laws to govern your Trust, ask yourself these questions:

  1. Is there any nexus to South Australia?
  2. Is this connection artificial or contrived?
  3. Where is the asset located?
  4. Does the Trustee reside or carry on business in this location?
  5. Where is Management located?

In Summary:

  1. You can build a Unit Trust under South Australian jurisdiction.
  2. There is no guarantee the Court applies South Australian law to your Trust.

Thankfully most of us are dead before an 80-year Trust ends. So Unit Trusts lasting 80 years may not be an issue.

Build your Unit Trust deed on our law firm website. Telephone us for help answering the questions.

After you build your Unit Trust deed you may wish to build a Unitholders Agreement.

Adj Professor, Dr Brett Davies, CTA, AIAMA, BJuris, LLB, Dip Ed, BArts(Hons), LLM, MBA, SJD
Legal Consolidated Barristers and Solicitors
Australia wide law firm
Mobile: 0477 796 959
National: 1800 141 612
Email: [email protected]

See also:

Stamp duty when you transfer business real property from Unit Trust to Self-Managed Super Fund

Tax effective business structures

Extending a Unit Trust’s vesting date

How to windup and vest a Unit Trust

12/02/2016

Unit Trust Deed

What is a Unit Trust deed? A Unit Trust deed sets out the Unit Trust rules. It is the Unit Trust’s rule book. Commonly, a Unit Trust either holds assets or runs a business: never both. A Unit Trust apportions trust assets according to ‘units’. As a Unit Holder, you […]