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Unit Trust

 

A trust is an obligation imposed on a person to hold property or income for the benefit of others (who are known as beneficiaries).

 

A trust does not have a separate legal existence like a company. All transactions in respect of the trust are undertaken by the trustee. Consequently, a transaction entered into by the trustee is a personal obligation.

 

Unit Trusts

Advantages

Disadvantages

Other Tax Issues

 

Unit trusts are a type of trust in which the entitlement of each beneficiary is divided into units.

Unit trusts do not last forever- they end on the ‘Vesting Day,’ which in most States and Territories is within 80 years of the establishment date.

The trust property is divided up into units, which can be subscribed to by unit holders who pay a set amount for each unit to the trustee. In return, the trustee issues subscribers with the appropriate amount of units. These units are easily transferred and can be reacquired by the trustee – in this way, units operate much like shares.

 

Subscribers are entitled to the trust fund’s income and capital, proportional to their holding units.

The trustee is the legal owner of the unit trust and is responsible for its management. As such, transactions are carried out in the trustee’s name, who is also responsible for signing documents on behalf of the beneficiaries of the trust. Corporate trustees do provide greater protection than individual trustees. The trustee is required to exercise reasonable care and act in the best interests of the beneficiaries. In addition, the trustee can also exercise “powers” such as the power to buy or dispose of mortgage assets etc. Trustees usually have the power to decide what to invest in, but must exercise skill and care in their decision making.

 

Discretionary Trusts

 

A type of trust where the assets or profits of the trust are flexibly distributed at the discretion of the trustee. More information is available here.

 

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Advantages

  1. Separation: Unit Trusts have several similarities to companies in that the trust is separate from the unit holders; the unit holders subscribe equity on units and the principals may be employed by the trust. The operations and management of the trust are hence, except in certain situations, distinct from its beneficiaries.
  2.  Protection of Assets: In a discretionary trust, no single beneficiary can claim all the assets of a trust because the trustee has legal title to the trust assets. Therefore if a beneficiary falls into debt the creditors of the beneficiary cannot attempt to seize the assets of the trust to satisfy the debt. This also means that if a beneficiary is involved in Court proceedings, such as a divorce for example, the Court cannot direct that the assets of a properly structured trust be used to satisfy the claim of a spouse.
  3.  Trust need not pay tax: A unit trust need not pay tax. Rather, the unit holders incur the tax on taxable profits derived by the unit trust.
  4. Tax advantages: The benefit of tax free capital gains and tax incentives may be passed through to the unit holders provided that appropriate structuring is taken.
  5.  Classes: Unit trusts offer different forms of income to different unit holders. This achieved under modern forms of unit trust deeds by providing for different classes of units.
  6.  CGT Concession: The 50% CGT discount is available to all trusts in relation to disposal of assets. The trust deed can also provide that the capital gains be allocated to beneficiaries for tax purposes by making beneficiaries specially entitled to the gains.
  7.  Deregulation: Unit Trusts are less regulated than companies and are easier to wind up.
  8.  Flexibility: Discretionary trusts allow trust income or capital to be distributed between beneficiaries in a tax effective manner. The trustee elects to distribute income to any beneficiary. The trustee can also choose to distribute the income in each year between the beneficiaries or to accumulate it, but the second option might result in a higher payment of taxes. Importantly, none of the beneficiaries have an enforceable right to require that any portion of income or fixed sum be paid to give them in a given year.
  9.  Estate considerations: Under a discretionary trust, a beneficiary cannot pass any trust property to someone else via a will because the trust property is not owned by any beneficiary. For example, if the beneficiary is a parent, they cannot give the trust’s property to their children.

However, the trust deed can state that if the original appointers of the trust die, the children can be made the new appointers. Hence, whilst not exactly identical to a situation where assets are passed by will directly to the children, the children will still be able to maintain control of the trust.

 

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Disadvantages

 

1. Tax losses: A tax loss in a unit trust cannot be distributed to the unit holders. Therefore it is important those unit trusts are structured in such a way that losses are incurred at the unit holder level rather than the unit trust level.

 

  1.  Deferral of Capital Gain: A capital gain cannot be deferred through the CGT roll-over relief provision when  assets are transferred into a trust.

 

  1.  Loss of Control: To a certain extent, because a trustee is in charge of the trust property, the beneficiaries may feel that they are not completely in control of their assets.

 

Of course there are remedies that are available if the trustee does not follow the trust deed, but this may be a time-consuming, frustrating and costly process that the beneficiaries might learn to resent.

 

4. Costs: The costs of setting up and maintaining a trust may not be justified depending on the situation.

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Other Tax Issues

 

Tax File Number: A trust must have its own tax file number and uses it when lodging its annual income tax return. The trustee needs to apply for a tax file number in its capacity as trustee of the trust. A tax file number can be applied for on the ABN application form.

 

ABN: If the trust is carrying on an enterprise in Australia, the entity that is trustee may register for an ABN in its capacity as trustee of the trust.

 

Who pays Income Tax: Whether or not a trust has a tax liability depends on the type of trust, the wording of its trust deed and whether the income earned by the trust is distributed (in whole or in part) to its beneficiaries. Where the whole of the net trust income is distributed to adult resident beneficiaries, the trust will have no liability. Where all or part of the net trust income is distributed to either non-residents or minors, the trustee will be assessed on that share on behalf of the beneficiary. In this case, the beneficiary is required to declare that share of net trust income on their individual income tax return, and also claim a credit for the amount of tax liability paid on their behalf by the trustee. Where the net trust income is accumulated by the trust, the trustee will be assessed on that accumulated income at the highest individual marginal rate.

 

If a trust is carrying on a business, each year all income earned by the trust and deductions claimed for expenses incurred in carrying on that business must be shown on a trust tax return. The Tax return also shows the amount of income distributed to each beneficiary.

 

Trusts are not liable to pay PAYG instalments. Instead, the beneficiaries or trustees may be liable to pay installments.

 

GST: If the trust is carrying on an enterprise, the entity that is trustee can register for GST in its capacity as trustee of the trust. This can be applied for on the ABN application form. A trust is required to be registered for GST if its annual turnover is $75,000 or more ($50,000 or more prior to 1 July 2007). The registration threshold for non-profit organisations is $150,000 ($100,000 prior to 1 July 2007).

 

Superannuation: Trusts may need to pay superannuation contributions for trustees if they are also employed by the trust. A trust also needs to pay superannuation contributions for other employees of the trust.

 

Stamp Duty: The trust is usually subject to stamp duty in all Australian States and Territories, except Queensland, and varies between each state. The trust deed must be stamped within 90 days of being executed.

 

Changing the Trust Deed: Generally speaking, only very minor changes can be made to the trust deed by the trustee (by executing a further deed of variation) with no adverse tax consequences. Most often, significant changes to the trust deed will result in a new trust arising or being resettled. This would lead to CGT and stamp duty liabilities.

 

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Our dedicated team can assist you on how to set your business up as a trust. Complete and submit an express enquiry form or call us on 1300 QUINNS (1300 784 667) or on +61 2 9223 9166 to arrange an appointment.