It Depends – Do I need a fixed or standard unit trust?

In this edition of ‘It depends’, associate Keeghan Silcock talks about whether you might need a fixed unit trust or a standard unit trust.

VIDEO TRANSCRIPT

Hi, and welcome to another edition of It Depends. Today, I’ll be talking about whether you might need a fixed unit trust or a standard unit trust.

Do I need a fixed or standard unit trust?

So, it depends. It depends on a number of factors, including what the proposed activities and assets of that unit trust are going to be. And also, who are going to be the unit holders of that unit trust.

What is the difference?

A fixed unit trust is typically one that is set up to comply with the requirements of schedule 2F of the 1936 tax act. This means that the trust deed will include restrictions on how the trustee can deal with the unit trust. For example, the trustee could only issue units to the existing unit holders in their existing unit holding percentages unless they agree otherwise. Other restrictions include if any amendment to the trust deed would have to require the consent of the unit holders, and also specific provisions regarding the redemption of units. If you don’t see those restrictions in a trust deed, typically it’s what we would then call a standard unit trust. You can have a fixed trust for other purposes, for example, for the purposes of the land tax provisions in New South Wales and that has to be drafted a bit differently and it needs to incorporate the relevant criteria in the Land Tax Management Act in New South Wales.

Why might I need a fixed unit trust?

So, one of the reasons why your clients might need a fix trust for the purposes of the 1936 Tax Act is if that trust is going to invest in shares in a company. This is because to pass on the franking credits to the unit holders of the unit trust, the trust will have to be a fixed unit, trust or otherwise make a family trust election. Similarly, if the trust is going to incur income losses, the trust, it’ll be much easier for the trust to satisfy the carry forward trust income loss rules. If that trust is fixed a trust otherwise, it might need to make a family trust election. Also, if the trust is going to own land in New South Wales, then the clients may want it to be a fixed trust for New South Wales land tax purposes. As this can allow the individual unit holders of that unit trust to be assessed on the land tax for that land and potentially access the benefit of the land tax threshold.

If your clients have any questions regarding the difference between a fixed unit trust and a standard unit trust, or would like advice about which option might be best for them, please feel free to contact a member of our team.