What is a Trust?

A trust is a relationship where a person (the trustee) is under an obligation to hold property for the benefit of other persons (the beneficiaries).

A trust is not a separate legal entity, even though, for tax law purposes, a trust return is required to be lodged.

A trust cannot exist forever. The trust comes to an end on the “Vesting Day”, and for most trusts (except those in South Australia) this day must generally occur within 80 years of the establishment date.

What is a unit trust?

A unit trust is a trust in which the trust property is divided into a number of defined shares called units. The beneficiaries subscribe for the units in much the same way as shareholders in a company subscribe for shares.

The assets of the trust, being the trust fund, are held by the trustee on trust for the unitholders, who generally are entitled to the capital and income of the trust fund in proportion to their holding of units.

A unit in a unit trust is really just a means of describing the share in the trust fund to which the unitholder is entitled.

From an investor’s point of view, owning units in a unit trust is seen to be the same as owning shares in a company.  However, they are fundamentally different – a shareholder has no interest in the assets of the company, whereas a unitholder does have an interest in the underlying property of the unit trust.

How is a trust established

Most unit trusts are established by subscription; that is, the initial unitholders (the “subscribers”) subscribe for units in the unit trust, paying a set amount for each unit to the trustee and, in return, the trustee issues those subscribers with the requisite number of units, much like shareholders applying for shares in a company. Again, like shares in a company, the units can (if the trust deed so allows) be partly or fully paid and can also be divided into different classes with different rights (such as different voting, income or capital rights). However, most units are issued fully paid and generally have equal rights. Our unit trust deed allows for there to be different classes of units, although it in effect requires units to be fully paid.

The parties to the trust deed of a unit trust by subscription will be the trustee and the subscribers or initial unitholders.

Note that it is possible to establish a unit trust by settlement, as with a discretionary trust, or even by unilateral declaration, but this is less common.

What are the benefits of a unit trust?

The main advantage of the unit trust over other types of trusts is that the parties involved are issued with units which (like shares):

• Define that party’s interest in the assets and income of the trust;
• Can be easily transferred; and
• Can be re-acquired by the trustee.

Other benefits of a unit trust include the following:

• Less regulation than a company;
• Taxation advantages over a company (in some cases);
• The trust deed can be tailored to the needs of principals and beneficiaries;
• No legal problems with redeeming units from the unitholder; and
• Easier to wind up than a company.

What are the disadvantages of a unit trust?

As the units themselves are an asset, a unit trust does not offer the same sort of asset protection as a discretionary trust does.  If a person is made bankrupt, then the person’s units will be treated like any other asset and could be sold to raise funds to pay their creditors.

Another disadvantage of a unit trust is that tax-free distributions cannot be made as easily from a unit trust as from a discretionary trust.

One other disadvantage of a unit trust (which may also be seen as an advantage) is that a unitholder’s interest in the assets and the right to receive income is based on their unitholding.  The flexibility and the advantage of being able to distribute on a discretionary basis is not usually present.

When does a unit trust start?

A unit trust by subscription is created when the unitholders subscribe for units in the trust.

A trust deed may be subject to stamp duty. The stamp duty (if any) can vary from one State (or Territory) to another.

Elements of a unit trust

There are a number of elements of a unit trust, including:

1. The trustee(s);
2. The trust fund (i.e., the trust property); and
3. The unitholders.

In addition, for a trust to exist, there must be a personal obligation on behalf of the trustee in respect of the trust property.

Traps for the unwary

Listed below are some common traps which may be exposed on an ATO audit:

• Non dated and stamped trust deed;
• The trust bank account was opened some months after the date shown on the trust deed (which then looks like the deed has been back-dated);
• No evidence of the subscription monies ever being paid;
• If the trustee is a company, no evidence that the board of directors resolved to accept the position of trustee in accordance with its constitution;
• The terms of the trust deed have not been followed;
• No written minutes showing distribution of income or capital; and
• Trustees or beneficiaries using the bank account as their own – which exposes them to tax or other consequences for breaches.

Features of the Trust Deed

The following are some of the features of Australian Business Structures Pty Ltd’s Unit Trust Deed, most of which are common to many unit trusts.  However, the deed should be read in full to fully ascertain the relationship between the trustee(s) and the subscriber(s).

• The trustee can issue units of different classes or reclassify existing units into different classes – refer subclauses 4.4 and 4.5. Trustees should obtain professional advice before taking any such action.
• New units must be first offered to existing unitholders on a pro rata basis, before they can be offered to others (unless the unitholders unanimously resolve otherwise) – refer clause 4.
• Similarly, transfers of existing units by unitholders (other than to family members, etc) must follow the same procedure as above – refer clause 6.
• The trustee can repurchase or redeem some or all of a unitholder’s units if requested and the trustee exercises its discretion to do so. Such units will generally be repurchased at their market value (unless all of the unitholders allow them to be repurchased on a different basis) – refer clause 12.
• Unitholders can meet to make decisions about the unit trust, including regarding the removal and appointment of the trustee. The procedures for these meetings are governed by the trust deed. Generally, each unitholder is entitled to one vote for each unit they hold – refer clause 16.
• The trustee must keep a register of unitholders (much like a company keeps a register of its shareholders) – refer subclause 5.3.
• The trustee does not have an indemnity from unitholders for any debts – unitholders are protected to the largest extent possible – refer subclause 18.3.
• A unitholder cannot demand that a particular asset owned by the trust is distributed to it – refer subclause 4.2.
• The unit trust under this deed may not be a “fixed unit trust” or “fixed trust” for income tax or other purposes (such as land tax). For income tax purposes, a unit trust may be a “Fixed Unit Trust” if the issue of new units or the redemption of existing units must be valued in accordance with Australian accounting principles, which is not a requirement of this trust deed.

Resolution of disputes

Clause 16 of the deed outlines how the unitholders can make decisions regarding the unit trust, including by holding meetings or by unanimously signing written resolutions.

In the event that there is an equal number of votes on an issue to be decided at a unitholders’ meeting (meaning there is a deadlock), subclause 16.10 either provides that the chairperson of the unitholders’ meeting has a second or casting vote, to resolve the deadlock, or that the matter can be referred for decision by arbitration by an independent arbitrator pursuant to the law of the Governing State (if a unitholder so requests).

Giving the chairperson a casting vote allows for deadlocks to be resolved relatively easily, but also gives the chairperson the power to sway the vote on matters should there be an equal number of unitholders both for and against a particular issue.

Therefore, if subclause 16.10 does not give the chairperson a casting vote, this avoids one person possibly wielding a disproportionate amount of power at meetings, but also means that resolving deadlocks may not be so easy (and could potentially be protracted and quite costly).

Disclaimer

This guide is intended to be a guide only. You should not act solely on the basis of the information contained in these notes because many aspects of the material have been generalised and the tax laws apply differently to different people in different circumstances. Further, as tax laws change frequently, there may have been changes to the law since the notes were written.

Australian Business Structures Pty Ltd, its directors, employees, consultants and author expressly disclaim any and all liability to any person, whether a purchaser or not, for the consequences of anything done or omitted to be done by any such person relying on a part or the whole of the contents of this publication.

None of the comments in these notes are intended to be advice, whether legal, financial product or professional. Do not act on the information contained in this guide without first obtaining specific advice regarding your particular circumstances from a tax or legal professional.

Copyright

© 2021 Australian Business Structures Pty Ltd.

All rights reserved. Except as permitted by the Copyright Act 1968, no part of these notes may be reproduced or published in any form or by any means, electronic or mechanical (including photocopying, recording, or by information storage or retrieval system) without prior written permission from Australian Business Structures Pty Ltd.

Law

The law is as stated 1 July 2021.