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Fixed Trust

 

Under a fixed trust, the beneficiaries have a fixed interest in the assets of the trust and a fixed entitlement to income.

Note that a unit trust is not necessarily a “fixed trust”.

Advantages

1. Companies offer the advantages of limited liability for the shareholders.

2. The imputation tax system ensures that if the company has paid tax, then the shareholders will get a credit for that tax paid.

a)    Income tax advantages

  • Net income in a financial year is distributed amongst unit holders. This distribution has to be included in the unit holders’ income in the financial year when the trust has earned the income and not the year when the income is distributed

  • The classification of trust income, for example, dividend income, foreign income, or capital gain continues to be recognized under the same classification in the individual unit holder’s income tax return and any imputation credit or foreign tax credits follows through to the unit holder as per trustee’s distribution

  • In certain circumstances, if unit holders are under 18 years of age, by any income distribution to them, trustees can avail their tax free threshold.

  • The trustee of a fixed unit trust must distribute all income of the trust and cannot accumulate income of the trust

  • Only net income of the trust has to be distributed, a trust can also contribute superannuation for all unit holders in proportion to their unit holding, which means that tax on income of the trust can be limited to tax rate on contribution to a superannuation fund, which at the time of writing is 15%

  • If the fixed unit trust has a loss and has received imputation credits in the financial year, the trustee can lodge its own income tax return and carry forward the loss to the next financial year and claim a refund of imputation credits

  • If units are owned via family trusts – various income tax, asset protection and estate planning advantages connected to family trusts are also available to unit holder.

b) Capital Gains tax advantages

on disposal of any asset of the trust, all unit holder are entitled to a 50% discount factor on capital gains. If assets are disposed after one year, this discount flows through to the unit holder’s upon distribution of capital income.

c)  Asset Protection advantages

  • Any distribution to a unit holder need not be physically paid to them. If the unit holders agree, trustee can retain money which it has decided to distribute to unit holders and establish a bare trust for that unit holder within the fixed unit trust.

  • Money’s belonging to unit holders who are under a legal disability, like minors; distribution money from a fixed unit trust, can be held by the trustee, under a bare trust arrangement, till they reach 18 years of age.

d) Land tax advantages

  • This fixed unit trust is treated as a “fixed unit trust” within the scope of Land Tax legislation in many states. What this means is that this fixed trust will receive threshold available to trustees who own land under this trust deed structure.

  • For example Section 3A Land Tax Management Act 1956 of NSW states a trust is a “fixed trust” if equitable estate in all of the land that is the subject of the trust is owned by a person or persons who are owners of the land for land tax purposes and equitable interest of the trustee as trustee of the trust is to be disregarded. That means that the persons who are beneficiaries of the trust (unit holders) under the trust deed are taken to be the owners of an equitable estate in the land that is subject to the trust.

  • This equitable interest is created because this trust deed specifically provides that the beneficiaries of the trust are presently entitled to the income of the trust and capital of the trust and can require the trustee to wind up the trust and distribute the trust property to the unit holders.

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Disadvantages

  • This trust cannot distribute capital or revenue losses to its beneficiaries. Which means that any losses have to be carried forward till a profit is achieved. As a result, should a trust incur a net loss, its beneficiaries, may be wise to have debt held at the unit holder level, rather than at the trust level, to avoid negative gearing type losses being locked up in the trust.
  • In a Fixed Unit Trust there is no discretion with the trustee as all income of the trust has to be distributed to the unit holders

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If you would like more information on trust structures and want to learn more about the most appropriate type of trust or trusts for your situation, please click here to submit an online enquiry form or call us on 1300 QUINNS (1300 784 667) or on +61 2 9223 9166 to arrange an appointment.