How to Set Up a Unit Trust
How to Set Up a Unit Trust
by Norman Elliot, Deloitte Touche Tohmatsu
Released April 2006
a Unit Trust?
trust is but one of a number of various types of “Trust” which exist.
Therefore, in order to begin any discussion of Unit Trusts it is important to
understand what a Trust is.
consists of the following 3 key elements:
(which may include money);
Trustee who has the legal title to the property and an obligation to hold
the property for the benefit of another person (referred to as the
beneficiary (or a number of beneficiaries) who has an equitable or
beneficial interest in the property.
cases a Trust will be established and governed by a Trust Deed which will set
out the rights and the obligations of the Trustee, the entitlements of the
beneficiaries and various other matters. Trust Deeds are legal documents which
can range from a few pages to hundreds of pages which are broad enough to deal
with a myriad of different possibilities.
a unit trust different to other trusts (for example, a discretionary family
trust) is that the entitlement of a beneficiary in the trust is represented by
the number of units that each beneficiary holds. In this way a unit in a unit
trust is similar to a share in a company but it must be noted that there are
significant differences between units and shares both from a legal and a
established and used for a variety of reasons and purposes which range from
family maintenance and personal reasons right through to Public Trusts (such
as managed investments and listed property trusts) which may have thousands of
unitholders and billions of dollars worth of assets.
use a unit trust
Trust can be used for a variety of purposes, including but not limited to:
Trust is often used when:
is more than one investor involved;
assets being acquired are eligible for the various Capital Gains Tax
envisaged that further equity in the business may be required at a later
point in time.
highlighted above, a key advantage of a Unit Trust is the ability to access
most (if not all) of the various Capital Gains Tax concessions, including the
small business concessions. This is one of the main advantages of a Unit Trust
over a company but it must be noted that some of the concessions (for example,
the small business 50% active asset concessions) are reversed once the capital
gain is distributed to the beneficiaries.
As in the
case of all structuring issues a detailed consideration of the parties aims
and future plans must be considered before making a decision to establish one
structure over another.
the trust: choice of settlor and trustee
discretionary trusts, most Unit Trusts are established by the unitholders
subscribing for initial units in the Unit Trust. The number and amount of
units subscribed for initially may be small in both number and value and these
are often referred to as foundation units.
Trust Deed will also provide for additional units to be subscribed for and
potentially for different classes of units to be issued by the Trustee with
varying rights attaching to them. However, for the purposes of this paper we
will focus predominantly on Unit Trusts with only one class of units, being
ordinary units, which entitle the holder to a proportionate interest in the
income and capital of the Unit Trust.
ways a Unit Trust may operate in a similar way to a company where shareholders
subscribe for shares and additional shares can be subsequently issued at a
later point in time. Whilst there are similarities there are also a
considerable number of differences in both the legal and taxation treatment of
of a Trustee will be determined by a variety of factors such as the:
may be an individual or a company and in some cases there will be more than
one trustee. Each situation should be considered and the appropriate Trustee
individual (or more than one individual) may be chosen and is usually the
least expensive as it does not involve the establishment of a company with its
associated formation and ongoing costs. This may be an option where there are
a small number of unitholders (for eg. 2-3 in which case each may be a
trustee) and the investments are passive (eg. property or shares).
other hand, a Unit Trust which has a large number of unitholders or is
expected to carry on a trading business should be established with a company
as the Trustee. A Trustee will
generally be entitled to be indemnified out of the trust fund from losses
incurred in its capacity as Trustee. However, if the losses exceed the trust
fund then the Trustee may be personally liable for the shortfall in which case
a corporate trustee may provide further protection.
recommended that the Trustee of a trust should be a company unless all of the
risks have been adequately considered and the client advised accordingly. It
is also preferable that a newly incorporated company will be used that has no
previous trading history.
and shareholders of trustee company
shareholders of the trustee company should generally be the unitholders of the
Unit Trust. Where the trustee company has no other assets than the assets of
the Unit Trust then this should generally be a straightforward process of
issuing new shares in the trustee company to unitholders for in the same
proportion to their unitholding in the Unit Trust.
standard Unit Trust the terms of the Trust Deed should provide certainty as to
distributions (ie. proportionate to the unitholding in the Unit Trust) though
there will be some discretions as to the investments and other decisions to be
made by the Trustee.
there are a small number of unitholders then it should be possible for each to
be a director of the trustee company to ensure they are kept fully informed of
all decisions being made. If not, then consideration should be given to not
only who is a director but also how the decisions of the Trustee company can
be made and whether there should be limitations on the exercise of powers to
protect all unitholders, in particular small unitholders.
should always be conscious of considering all the circumstances and providing
appropriate advice only after these have been considered. An important
consideration for any Unit Trust is the setting up of a Unitholders Agreement
which all the unitholders will be a party to. This will further detail the
rights and responsibilities of the unitholders and it should also ensure that
if things do not work out that the parties are adequately informed of how the
parties will act.
of the trust
in the case of a Unit Trust, can be held by a variety of parties depending on
the circumstances involved and the decision which is being made.
running of the Unit Trust the Trustee will have the day-to-day control for
decisions and for carrying on the activities or business of the Trust. The
trust deed may constrain the Trustee in certain circumstances from exercising
its powers and in establishing a Unit Trust specific restrictions should be
considered. For example, the trust deed may prevent the Trustee from disposing
of the assets of the Unit Trust worth >$20,000 without the approval a
majority of the unitholders.
discretionary trust, a trustee of a Unit Trust will not have as considerable a
discretion to determine distributions of income and capital and these will
generally be prescribed in the deed. As a result, the Trustee will not
exercise as much control over a Unit Trust as it does in the case of a
the unitholders (acting alone or as a majority) may have the ability to remove
the Trustee and such power will generally be contained in the trust deed.
Where the unitholders can remove the Trustee then they will exercise influence
and power over the Trustee which may be used to determine the actions of the
Trustee, including the removal of the current Trustee and the appointment of a
result, the control of the Unit Trust will depend on the terms of the trust
deed and also the unitholders themselves although ultimately the power rests
with the unitholders where they have the power to remove the Trustee.
trust or non-fixed trust?
concept of a fixed trust or a non-fixed trust is an important one under
various provisions of the Tax Act. In particular it determines the potential
application of certain tests contained in the trust loss provisions and will
also impact on:
matters concerning family trust elections;
ability of the Unit Trust to pass on imputation credits to its unitholders
when it receives a franked dividend; and
application of the company loss provisions where the Unit Trust owns
shares in a company with tax losses.
cases people mistakenly assume that a unit trust is a fixed trust and this can
have considerable adverse consequences for the both the trust and other
Trust will not always be a fixed trust and the terms of the trust will be
vital in determining whether it can satisfy the definition of a fixed trust.
If it is not a fixed trust then the Unit Trust will be a non-fixed trust and
therefore the tests applying to it will be considerably harder to satisfy.
Without going into great detail of the tests for fixed and non-fixed trusts
the following questions should be answered in relation to the trust deed:
the Trustee redeem units and if so can the redemption be undertaken for
less than the market value of the units?
there any discretions given to the Trustee in respect of making
distributions to unitholders (for eg. are there discretionary units on
accumulated income treated? Is the accumulated income held for the benefit
of the existing unitholders or if the unitholder ceases to be a unitholder
does their entitlement to the accumulated income cease?
It is not
possible to simply conclude that a Unit Trust is a fixed trust and this point
cannot be overstated.
holders, classes of units and rights
unitholders of a Unit Trust will be those which have subscribed for units in
the Unit Trust and are entered into the register of unitholders. Again, most
Unit Trusts will operate in a similar way to a company with unitholders have a
certificate to evidence their unitholding and their entitlements under the
As in the
case of companies, there are various classes of units which can be issued and
rights which pertain to these. These may include (but are not limited to):
units – which entitle the holder to an entitlement to the income and/or
the capital of the Unit Trust. The Trustee may determine to exercise a
discretion to make a distribution to such a unitholder in a similar way to
a discretionary trust. These units may also be called Special Units and a
Unit Trust with discretionary units may also be referred to as a Hybrid
Trust in that it is partly a discretionary trust and a Unit Trust;
units – certain units may only be entitled to receive distributions out
of the income of the Unit Trust and are not entitled to receive
distributions of capital. In some cases these may contain a fixed rate of
return (for eg. 8% p.a);
units – as in the case of income units but only receive distributions
out of the capital of the Unit Trust; and
– the type of units can be very broad and contain various components of
all of the above. The trust deed will prescribe the type of units which
can be issued but in many cases this will be of any type at the discretion
of the Trustee.
As can be
seen from the above, the type of units which can be issued is extremely broad
and will be covered by the terms of the trust deed. This provides flexibility
in respect of structuring a Unit Trust but for the purposes of the remainder
of this paper we will focus solely on a Unit Trust with ordinary units which
entitle the holder to a proportionate interest in the income and capital of
the Unit Trust.
There is a
considerable amount of case law, Australian Tax Office rulings, journal
articles and commentary regarding the income of a trust and the application of
the tax law. The term “income” can have different meanings and include
varying amounts depending on whether you are referring to trust income,
accounting income or net income. Therefore, in considering the wording of the
income clause of a trust deed it is necessary to understand the following
concept of trust income is a very important one and has a long history. A
detailed discussion of it is beyond the scope of this paper but the comments
below should assist the reader in understanding why this may differ from
accounting income and net income.
law purposes there is a clear distinction between income and capital and one
of the main reasons for this is that trusts, especially those created by will,
will include one beneficiary who is entitled to a life interest in an asset
(for eg. the right the income from the asset until they die) and another
person (referred to as the remainderman) will have the reversionary interest
in the asset. On the death of the beneficiary with the life interest the asset
will pass to the remainderman who will be free to dispose of the asset.
factors may arise where the assets are disposed of, expenses are incurred in
relation to assets (for eg. repairs) or other transactions occur in relation
to the assets and a number of cases have been heard in order to determine
which of the beneficiaries is entitled to the proceeds from sale or the
proceeds of other transactions. These cases have been pivotal in determining
the meaning of ordinary income under the Tax Act but as we will see the
concept of net income may differ significantly to trust income.
income will be the income of the trust according to accounting principles. As
in the case of trust income there will be a number of complicating matters in
relation to determining the accounting income of the trust and this is likely
to differ from both trust income and net income for tax purposes.
accounting income may also vary depending on the size of the trust and whether
it is required to comply with any particular accounting standards.
outset it is worth noting that the phrase net income is often used in a trust
deed though not when referring to net income for tax purposes. It is often
used to refer to the income of the trust remaining after taking into account
deductions against that income. At all times the definitions and
interpretations sections of the trust deed should be considered.
is a tax law concept and is defined in subsection 95(1) of Income Tax
Assessment Act 1936 as:
total assessable income of the trust estate calculated under this Act as
if the trustee were a taxpayer in respect of that income and were a
resident, less all allowable deductions…………..”
therefore is a similar concept to taxable income under the Tax Act and in
order to understand this concept it is worth noting the following points:
income will include amounts which are capital in nature, the best example
to illustrate this is capital gains which are included in the definition
of assessable income but are not income according to the general
understanding of that term;
income will include amounts such as the imputation credits attached to a
franked dividend even though these are clearly not income for trust or
deductions will not include amounts which are of a private or domestic
nature or that are specifically excluded from being deductible under the
Tax Act; and
deductions will include certain amounts which may not be deductible for
accounting or trust law purposes such as building allowances under
Division 43 of ITAA 1997.
result there is likely to be differences between trust income, accounting
income and net income in relation to even the most straightforward of trusts.
This can result in a variety of tax implications which should be considered
and are beyond the scope of this paper.
income for the purposes of the trust deed
it is important when establishing a trust deed to give due consideration to
the definition of income and what is intended by the parties. There is a
divergence of views as to whether the trust deed should define income to be
net income for tax purposes, accounting income or trust income and this is an
issue on which the author does not provide a concluded view.
convenience it may be preferable to have income defined as accounting income
such that it is consistent with the accounts prepared by the trust though it
should be noted that the differences between income and net income should be
considered and appropriate steps taken before the trust is settled to
any income clause should be drafted to ensure that the Trustee has the power
whether an amount is income or capital for the purposes of the trust deed;
appropriate, to enable the Trustee to stream various classes of income to
a beneficiary. (This may not be necessary in a standard private unit trust
where beneficiaries have similar characteristics and tax attributes.
and capital returns
Trust deed will generally include clauses which deal with the redemption of
units and, in particular, the price at which such a redemption will take
place. A redemption of units may be undertaken for a variety of reasons
including the realization of part of the assets of the Unit Trust or to return
capital of the trust which is excess to its requirements.
discussed below, a redemption may also be required to enable a unitholder to
exit its unitholding without needing to find a purchaser and will also prevent
a new unitholder being introduced which the existing unitholders do not agree
redemption price should be clearly set out in the trust deed and will take
into account the fair value of the units being redeemed. This should include
consideration of the type of unit, the conditions attaching to it and any
other relevant circumstances. Some trust deeds may enable the Trustee to
redeem units at a price it determines without reference to the fair value of
the units. Such a trust is likely to give rise to adverse consequences under
the trust loss rules and also for the unitholder under the CGT provisions.
required to have a vesting date (with some limited exceptions) to ensure that
they do not infringe the rule against perpetuities.
The rule against perpetuities is designed to prevent property being
tied up for considerable periods of time and without it a person could place
property on trust almost indefinitely.
vesting date refers to the date on which the Trust will come to an end and any
remaining property of the Trust is then distributed to the beneficiaries in
accordance with the terms of the Trust Deed.
the vesting date must be no later than 80 years from the day on which the
Trust was settled and all other Australian jurisdictions have this requirement
(or a similar requirement).
vesting date puts an upper limit on the lifetime of a Trust but it is possible
for a Trust to be established with a shorter lifetime and this is often the
case when a Trust is used solely for a specific purpose.
addition, most Trust Deeds provide for the vesting date to be brought forward
such that the property may be distributed to the beneficiaries prior to the
original vesting date. It is recommended that a Unit Trust should always have
such a clause to enable the trust to be vested at a time that the unitholders
agree and such clauses generally require a unanimous vote of the unitholders.
and disposal of units
of additional units will be covered in the trust deed and may contain
restrictions on the types of units and the requirements to be satisfied prior
to new units being issued. The trust deed may also contain restrictions on to
whom a unitholder may dispose of their units to and any disposal which are not
in accordance with this will not be registered by the Trustee.
example, many private Unit Trusts will contain a procedure which each
unitholder must follow in order to dispose of their units which contain some
or all of the following:
trustee must be notified and may choose to redeem the units at a price to
be determined. This may be determined by a formula under the trust deed
which takes into account the net asset position of the Unit Trust;
existing unitholders may be called upon by the Trustee to subscribe for
further units in the Unit Trust (in proportion to their existing
unitholding) in order to enable the Trustee to redeem the units;
existing unitholders may acquire the units (in proportion to their
existing unitholding) at the price determined;
Trustee may be empowered to borrow funds or to issue a special class of
units to enable the redemption of the units; or
all of the above, the sale may be approved and registered
difference between the issue and disposal of units are that the former will
not (of itself) give rise to a taxing point for the purchaser or the other
units if it is undertaken at arm’s length. This is another example of the
similarity between a Unit Trust and a company.
disposal of units will give rise to a taxing point, whether as income or a
modern trust deeds there will be a considerable amount of time spent on
defining terms used throughout the trust deed and also in assisting the
interpretation of the wording used. This is a considerable advance on the
older style trust deeds which use extremely legalistic and old fashioned
wording which at times makes it very time consuming and difficult for an
advisor to interpret.
already discussed the main definitions and clauses above, including the
definition of “income” for the purposes of the trust deed, and these
should be reviewed and considered in detail prior to the deed being settled.
a variety of other clauses which are used in trust deeds and these are
discussed briefly below:
– these are contained at the start of the trust deed and set out the
purposes and/or the facts which have given rise to the establishment of
of trust – also contained at the start of the deed and will include a
statement that the Trustee holds the Trust Fund on trust and in accordance
with the terms of the deed;
clauses – the deed will often include clauses which set out the removal,
appointment, restrictions on dealings, clauses which protect or indemnify
the Trustee and other relevant matters;
or limitations – such as to carry on a business, to borrow money, to
acquire certain assets etc.
duty on settlement
imposes stamp duty and this extends to include a duty payable on the
settlement of a trust. As the states vary from one to the other it is
important to consider the relevant state in which the trust is settled and
also the assets of the trust and the Trustee.
of duty varies from state to state and in
stamp duty is imposed on a settlement of trust at ad valorem rates where the
trust is declared over dutiable property or $200 where it is over non-dutiable
important to also consider stamp duty in respect of the issue, redemption or
transfer of units, especially in the case of unit trusts which hold an
interest in land, as each state has rules for dealing with land rich entities
such as trusts. In addition, marketable securities duty also can apply in all
) to the transfer of units in a unit trust.
Studies (with solutions)
Bill are looking to establish a new wine retailing business specialising in the
sale of “cleanskin” wines at discounted prices to be called VineStore. There
is a lot of competition in this marketplace but Arnold and Bill each bring
experience which can greatly assist the business but it is not free from risk.
Bill have other investments (mainly shares and property) which they own in their
own name and if the business is successful they will look to expand the number
of retail outlets they own.
the expansion is expected to come from borrowings but they will also be looking
for additional investors and have a number of people who would be interested in
taking a minor stake (between 5-10%) in the business.
intending to establish the VineStore Unit Trust and seek your advice on the
mechanics of establishing it and resolving some of the key issues in relation
of trustee should Arnold and Bill use for the VineStore Unit Trust? Why should
they use that type of trustee?
preferred option for a trustee should always be a company unless there is no
risk involved in the operations of the Trust.
will provide additional protection in the event of the business conducted by the
VineStore Unit Trust being unsuccessful. A company will also have the added
advantage of not requiring a disposal of assets from one trustee(s) to another
on the change of trustees.
business is successful, how could new investors be admitted to the VineStore
There are a
number of ways new investors could be admitted. These include:
disposal by Arnold or Bill of a part of their unitholding;
issue of new units in the VineStore Unit Trust; and
to the VineStore Unit Trust which contains a right to a fixed return and a
return contingent on the profitability of the VineStore Unit Trust.
would be the preferable method for admitting new investors?
preferable method would be to issue new units in the VineStore Unit Trust as
this should not give rise to a tax liability for the trust, the existing
unitholders and the new unitholders. The issue of new units would be by way of
subscription for new units which would provide an injection of the required
funds for the business expansion.
The issue of
new units would dilute the unitholding of Arnold and Bill in the same way as a
sale of their existing units but they would not be subject to any capital gains
Milly have been lifetime friends and have decided to establish a business
together to be owned 50:50 The business will make and sell specialty cakes for
weddings, birthdays and functions.
previously conducted a business using the Madeira Unit Trust which she holds all
the units in (100 in total). The Madeira Unit Trust previously operated a
cleaning business which closed down when Jane had her first child. The Madeira
Unit Trust has a corporate Trustee called JN Pty Ltd which Jane owns all the
shares in. JN Pty Ltd previously was a family investment company used by Jane
and her husband but which now has no assets in its won right.
money, Jane and Milly decide to use the Madeira Unit Trust (with JN Pty Ltd as
trustee) rather than establish a new trust and company. The Madeira Unit Trust
issues 100 new units to Milly to ensure a 50:50 unitholding.
has been running for about 6 months and Milly has come to you for advice on her
personal tax affairs and explains what has happened and the structure they have
concerns do you have with the structure that has been used?
concern for Milly relates to the fact that whilst she owns 50% of the units in
Madeira Unit Trust she does not legally have control over the day-to-day
operations of the business as JN Pty Ltd is wholly owned by Jane. Whilst the two
are lifetime friends and have been working well together this situation should
be addressed and remedied.
the use of both a Unit Trust and also a company which have previously been used
can give rise to possible risks, such as claims by former creditors including
the ATO for unpaid taxes. Using a clean structure would have been the preferred
option with a new company incorporated.
steps do you recommend that Milly should take to rectify these concerns?
In order to
rectify the issue of control, Milly should seek to have the following done:
trustee company incorporated to replace JN Pty Ltd;
Ltd to issue new shares in itself to Milly to ensure that she has a 50%
unitholders agreement be entered into which would outline the way in which
the unitholders will operate and, in particular, that Jane will not use her
control of JN Pty Ltd to run the business without consulting with Milly on
deed should provide a process for replacing JN Pty Ltd as the trustee.
use of Madeira Unit Trust could be rectified (in part) by the establishment of a
new trust which would acquire the business from Madeira Unit Trust.
use of JN Pty Ltd could be rectified by replacing JN Pty Ltd with a new company
which would be owned 50:50 by Jane and Milly. JN Pty Ltd would need to dispose
of the trust assets to the new company.
likely tax imposts could be encountered (if any) in rectifying the structure?
establishment of a new trustee company to replace JN Pty Ltd should not give
rise to any adverse tax liability. The disposal of the assets of the business
from JN Pty Ltd would not be a CGT event and there should be stamp duty relief
available for the change of trustee.
The issue of
new shares in JN Pty Ltd to Milly to ensure that she has a 50% shareholding
should not give rise to any tax consequences for JN Pty Ltd, Jane or Milly.
unitholders agreement should not give rise to any tax imposts.
of the assets from Madiera Unit Trust to a new trust is likely to give rise to a
tax liability as the business has been trading profitably and there is no
roll-over relief for such a disposal.
Exercises (with solutions)
Trust has just finished its activities for the 2005 income year. Its income and
expenses are as follows:
that accounting and tax depreciation are the same.
Unit Trust Deed provides that the income of the trust is calculated in
accordance with accounting principles.
capital gain is not eligible for the 50% CGT discount.
Calculate the income of the FBC Unit Trust according to the trust deed.
of the FBC Unit Trust will be its accounting income as per the trust deed. This
will be $4,400.
It is the
sum of the rent, interest and dividend less the deductions for repairs,
depreciation and parking fine.
Calculate the net income of the FBC Unit Trust for tax purposes.
income is calculated in accordance with the Tax Act, specifically ss95(1) of
Income Tax Assessment Act 1936. This will be $4,750.
difference of $350 between the two amounts is caused by the fact that:
will need to be grossed up to take account of the franking credit (ie. $700 x
(30/70) = $300).
fine will not be deductible for tax purposes.
Allen have come to you for advice on establishing a Unit Trust as a friend has
recommended a Unit Trust structure over a company.
looking to establish a structure to hold their property investments and they
will take a long term view of these investments.
some of the similarities of a company and unit trust?
company and a trust can issue new units/shares without giving rise to tax
implications for the entity and the unit/shareholder.
will maintain a unit/share register and issue a document to evidence the
entitlement of the unit/shareholder in the entity.
will be able to redeem the units/shares issued in it.
units/shares will be able to be sold or disposed of to another person or entity.
units/shares should have an entitlement to an equal share in the profits of the
entity proportionate to their number. This is subject to any special units or
other rights which may be on issue.
some of the key differences?
A company is
a separate legal entity which has the power to enter into contracts and transact
on its own account. A trust on the other hand is a relationship between the
trustee and beneficiaries and is not a separate legal entity. The trustee, in
its capacity as the trustee of the trust, will acquire the assets and hold these
for the benefit of the beneficiaries.
A trust will
be eligible for the 50% CGT discount whereas a company will not be. (Note that
in some circumstances the benefit of the 50% CGT discount will be reversed for a
Malcolm and Allen use a Unit Trust over a company structure?
on the fact that they are looking to hold the property investments for the long
term it is reasonable to conclude that any gains made on the property.