Unit Trust Deed

What is a Unit Trust deed?

A Unit Trust deed sets out the Unit Trust rules. It is the Unit Trust’s rule book.

Commonly, a Unit Trust either:

• holds assets; or
• runs a business.

For asset protection, a Unit Trust would not mix assets (low risk) with a business (high risk).

A Unit Trust apportions trust assets according to ‘units’. As a Unit Holder, you get beneficial ownership of trust property according to the number of units you own.

For example, you have 150 units and I have 50 units. Therefore, you own 75% of the Unit Trust assets. I own 25% of the assets in the Unit Trust. So, if the Unit Trust’s income is $100,000. You get $75k. I get $25k. There is no discretion.

An Australian Unit Trust is a cross between a Family Discretionary Trust and a company. In a Family Discretionary Trust, the Trustee holds the assets for the Beneficiary. So too, the Unit Trusts’ Trustee holds the assets for the benefit of the Unit Holders.

 

Company vs Unit Trust

Australian Unit Trusts are similar to companies.

• Unit Trusts have Unit Holders.
• Companies have shareholders.

• Unit Holders hold units in Unit Trusts
• Shareholders hold shares in companies.

Units may change in value. This is just like shares. The High Court of Australia demonstrates the benefits of Unit Trusts over companies. See Charles v Federal Commissioner of Taxation (1954) 90 CLR 598. This is because:

• in a company, a shareholder has no interest in company assets.
• in contrast, a Unit Holder has a proprietary interest in the Unit Trust assets.

This is in exact proportion to the Units that you hold in the Unit Trus.

Is it better to purchase a commercial property in a company or a unit trust?

With a Unit Trust, you potentially get a 50% CGT relief. Plus you may get the small business CGT relief. A Unit Trust does not usually pay the CGT on the sale of an asset. Distributions from the Unit Trust form part of the unitholders’ income. This is subject to the unitholder’s own marginal tax rate. Franking credits, from company dividends like BHP, are available for unitholders in a fixed unit trust.

A Unit Trust reduces CGT. A company is less likely to get the CGT discounts and relief.

In contrast, wealth is trapped in a company. It is hard to get wealth out of a company. Also, unless you sell the shares in the company (which buyers generally do not want to do) the company does not get the 50% CGT relief. And it is difficult to get the benefit of the small business CGT relief.

For that reason, Legal Consolidated generally considers a trust, such as a unit trust, the better vehicle in which to purchase a property – especially an appreciation asset.

But CGT on the sale of the commercial property is only one issue. What about the income earned on the commercial property each year?

However, the eventual sale of the appreciating asset is only one issue. During that time the commercial property earns income.

A downside of a Unit Trust is that you end up usually distributing (transferring) the annual profit out of the Unit Trust every year. This is because the unitholder pays the tax on their own tax return. In contrast, a company can ‘hoard’ or ‘retain’ the profit at the company’s fixed and constant tax rate. 

For example, a Unit Trust and a company both have an income of $100k:

• The Unit Holders pay tax on that income on their marginal tax rate. For a human, this is up to 47%. If you pay the tax you generally want your money.
• However, the company itself pays tax on the income. This is up to 30%. It then retains the income in the company.

Negative gearing is quarantined for both the unit trust and the company

Negative gearing flows through to a sole proprietor, partners in a partnership and a Bare Trust. That reduces your tax. It is wonderful.

But companies and trusts (including a Unit Trust) cannot pass on the ‘loss’ to the shareholder or Unitholder. The loss is trapped in those vehicles. You can only ‘use up’ those losses by putting income-producing assets in the company or Unit Trust. “Negative gearing” is hard to achieve unless the company or trust has income to use up the losses.

A negative gearing loss on the property, for both company and Unit Trust, is trapped in both vehicles. You need other income to offset the loss.

You may be able to carry the tax loss forward to future financial years. If you cannot carry forward the losses to subsequent financial years then the ‘loss’ is (pardon the pun) lost forever. 

Tax Advantages of a Legal Consolidated Australian Unit Trust

In the company, there is a fixed tax rate. It is a constant tax rate. In contrast, the Unit Trust’s Unit Holders pay tax on the profit at the Unit Holder’s personal tax rate – which may be zero. In other words, the company pays tax on income. In a Unit Trust, the Unit Holders, themselves, generally pay the tax.

How a Company pays tax:

Each financial year the company pays tax on its profit. The tax paid attracts an ‘imputation credit’. The company may retain this profit. The company does not have to pay the profit to the shareholders. The company does not have to declare a dividend.

At some point in the future, it can pay that profit to the shareholder. This is called a dividend. Only at that time does the shareholder have to pay tax on the dividend. The paying of a dividend is income in the hands of the shareholder. However, the shareholder can use the imputation credit to reduce the tax it would otherwise have to pay. For example, let’s say the company has already paid tax on the income at a tax rate of 25%. It then distributes that income to the shareholder. If the shareholder’s marginal tax rate is 45% then the shareholder only pays an additional 20% tax on the dividend.

How a Unit Trust pays tax:

In contrast, a Unit Trust distributes all its income to the Unit Holders. This is at the end of each financial year. The Unit Holders then pay tax at their personal marginal tax rate. (Any income not distributed is taxed automatically at the highest marginal tax rate. This is in the hands of the Unit Trust trustee)

If the Unit Holder does not earn much income that financial year then the tax on the Unit Trust income may be zero. But if the Unit Holder earns a lot of money that financial year then its tax rate may be far higher than the fixed (constant) company tax rate. This is why often you hold the Units in a Family Trust: rather than in your own name.

The advantage of a company is that you can retain the income at a constant tax rate and not distribute it to the shareholders. The shareholder’s tax rate may be much higher than the company’s tax rate. This sounds good, except that it is difficult to use the money in the company for personal use. The company assets and profit are ‘trapped’ in the company. But you did temporarily save (or rather defer) the higher tax rate.

In contrast, each financial year the Unit Holder pays tax on the income it derives from the Unit Trust. (The Unit Trust is therefore not taxed directly.) Our Unit Trust deed allows you to reinvest the income back into the Unit Trust. However, the Unit Holder must still pay tax on the income first. What the Unit Holder then does with the money is up to the Unit Holder. If the Unit Holder wishes to put the after-tax dollars back into the Unit Trust then it may do so.

Legal Consolidated’s Unit Trust deed reduces CGT Event E4

There are adverse consequences of CGT event E4 when a trustee of a unit trust makes non-assessable distributions to beneficiaries. Event E4 is often only discovered after a capital gain is triggered. The Legal Consolidated Unit Trust is unique in that it identifies when such a gain arises and allows the use of a range of exemptions and strategies to eliminate or reduce its impact.

Our Unit Trust deed takes full advantage of the specific legislative exclusions available to reduce the capital gain. This is also under the CGT discount and the small business CGT concessions.

Family Discretionary Trust vs Unit Trust

Unit Trusts and Family Trusts do different things.

Unit Trusts have ‘negotiability’: you can sell and buy units, and fixed annual entitlements to income and capital gains. The Unit Holders of Unit Trusts get 100% of their entitlement. The trustee has no discretion to vary your entitlement.

In contrast, Family Trusts are discretionary. This means that there are no fixed entitlements for the children. Mum and Dad (as the Appointors) direct the Trustee of the Family Trust to distribute income. This is generally to the lowest income earners in the family for the purposes of reducing tax.

Unit Trusts are not a substitute for Family Trusts. Both types of trusts are often used together. For example, a Family Trust often holds units in a Unit Trust.

Family Trusts work for one family. Unit Trusts are appropriate for two or more families – joint ventures, businesses or partnerships in the managing of assets. Instead, if you control assets in a single family, consider building one of our comprehensive Family Trust Deeds.

Unit Trust vs partnership of family trusts

A company and a family trust are usually inferior to a Unit Trust. The greatest competition to a Unit Trust is a Partnership of Family Trusts. See here.

Do Unit Holders and Trustees go down with an insolvent Unit Trust?

The Unit Trust trustee is liable for the Unit Trust liabilities. The trustee has the right to indemnity. This is against the Unit Trust’s assets. If there is a shortfall the Unit Holders may also be personally liable.

We review Unit Trusts going insolvent. Often the Unit Holders are liable to pay for the shortfall of assets. This is when the Unit Trust goes broke.

Unit Holders in a Unit Trust are liable to indemnify the trustees of a Unit Trust. This is for liabilities incurred by the business of the Unit Trust. See Justice McGarvie in Broomhead Pty Ltd (in Liquidation) v Broomhead Pty Ltd (1985) VR 891.

However, this rule does not apply if the right to indemnity is expressly revoked from the Unit Trust deed. Our Unit Trust deed protects unitholders from liability incurred by trustees. Our Unit Trusts deed benefits the unitholders.

Common faults of Unit Trust deeds

Be careful of who drafts your Unit Trust deed. Common faults:

• The majority of the Unit Holders controlling 100% of the Trust assets
• The Unit Trust not complying with the Australian Tax Office lending guideline
• The Unitholders are personally liable for the Trust debts. This is under Broomhead Pty Ltd (in Liquidation) v Broomhead Pty Ltd (1985) VR 891
• An implied relationship between unitholders – they, therefore, become jointly and severally liable for each others’ debts
• The trustee pays tax on the trust income at the highest marginal tax rate. This is under section 99 Income Tax Assessment Act 1936 (Cth)

Can the value of the units change over time?

The value of the Units can change over time. Today you issue Units for $1.00 each. If your business goes well or the value of the assets increases then a unitholder may sell his Units for say $5.00 each. Or the trustee of the Unit Trust may issue new Units at a higher price to people wishing to inject money into the Unit Trust. That is a decision for the unitholders.

Can I update the Unit Trust deed?

While Family Trust deeds and Self-Managed Superannuation fund deeds are updated on average every 5 – 8 years, Unit Trust Deeds do not usually need updating to deal with tax and trust matters. But of course, you can update a Unit Trust, as often as you wish, if all the unitholders agree.

Want to formalise the relationship between the unitholders? Build a Unitholders Agreement.

Unitholders may debate what the Unit Trust will do and invest in. But this is not a matter of the Unit Trust deed or a Unitholders Agreement. This is much like a company and shareholders agreement. When shareholders debate on how to run the business they do not usually update the company Constitution or the Shareholders Agreement.

Two most misunderstood Unit Trust questions:

1. Is there a limit on the number of Unit Holders?
2. Can a Unit Trust last forever?

1. Limit on the number of Unit Holders?

The Government does not want you to have too many members of the public involved in a Trust. Therefore, the Government regulates the number of Unit Holders. A Unit Trust is classified as a Public Unit Trust. This is if there are 50 or more Unit Holders: s 102P(1)(c) Income Tax Assessment Act (1936).

For example, the Australian Medical Unit Trust has 500 Units. It gives Units to 52 separate people. In this example, the Trust is a Public Unit Trust as it has more than 50 Unit Holders.

Becoming a Public Trust allows you to have an unlimited number of Unit Holders. But it increases administration and taxation. Your Trust is potentially taxed as a company.

A Public Unit Trust is avoidable if 20 or fewer Unit Holders own 75% of the units.

In this example, the Australian Medical Unit Trust has 500 Units. When they sell these Units they sell 375 of them to 18 Unitholders. The remaining 125 are distributed amongst the other 42 Unit Holders. This means that the first 18 Unit Holders own 75% of the overall units (375/500 = 75%).

Is your Unit Trust a Managed Investment Scheme?

Do you have more than 20 Unit Holders? Under the Corporations Act (2001) are liable for $22,000 and five years’ imprisonment. This is if your Unit Trust is a Managed Investment Scheme (MIS) – and you don’t register it. In an MIS the investments are pooled together to produce a beneficial interest for the Unit Holders.

How does a Unit Trust turn into an MIS?

1. You need 20 or more Unit Holders, and
2. The Unit Holders don’t have the day-to-day management of the Unit Trust.

Day-to-day Management

Your Unit Trust is NOT an MIS if your Unit Holders have control of the day-to-day operations of the Trust. However, what if your Unit Holders only share in the profit? Then your Unit Trust is an MIS. If you have more than 20 Unit Holders, you are required to register your MIS. Failure results in penalties.

If you have more than 20 Unit Holders, you are required to register your MIS. Failure results in penalties. Registration as an MIS is with ASIC. It may require a Product Disclosure Statement and other formalities.

ATO’s view on when a unit trust is taxed like a company

The ATO in 2017 released a Decision Impact Statement (DIS) on the High Court decision in ElecNet (Aust) Pty Ltd (as trustee for the Electrical Industry Severance Scheme) v FCT [2016] HCA 51.

In its decision, the High Court unanimously dismissed the taxpayer’s appeal and confirmed that the Electrical Industry Severance Scheme (EISS) was not a “unit trust” within the meaning of Div 6C of Pt III ITAA 1936. It was, therefore, not entitled to be taxed like a company.

It did so on the basis of finding that the interests of the electrical industry workers in the scheme could not be characterised as “units”. In arriving at its decision, the High Court also indicated that the workers’ interests were “discretionary” in nature. This is contrary to the concept of a fixed “unit” interest.

ATO’s view on taxing a Unit Trust like a company

The ATO considers that the High Court’s decision is consistent with its view of the law. (I am sure that the High Court of Australia takes great solace that the gathering of bureaucrats running the ATO agrees with the Court.)

The issue before the Court was whether the severance scheme was a unit trust. This is under Div 6C of Pt III ITAA 1936. The Court held that the rights conferred on employees by the Deed did not support the conclusion that the EISS was a unit trust for the purposes of Div 6C.

But why? The ATO said that the Court considered:

1. the effect of the terms of the Deed; and
2. the construction of the terms of the provisions of Div 6C. This is looking at the text, context and purpose.

The Court found that there was no reason in the text or context of Div 6C to attribute to the undefined expression “unit trust” any meaning. This is other than the meaning from the language of Div 6C

The ATO also notes the High Court’s concern. This is the unattractive consequence that severance payments made to workers under the scheme are taxable. This is in the hands of the recipients as unit trust dividends.

Summary ElecNet case:

1. There is no limit on the number of Unit Holders in a Unit Trust.
2. If your Unit Trust has more than 20 Unit Holders it may need to be registered as a Managed Investment Scheme.
3. If your Trust has 50 or more Unit Holders it is a Public Unit Trust. You escape this if 75% of the units are owned by 20 or fewer Unit Holders. 

2. Can a Unit Trust last forever?

Like all good things, Unit Trusts have to come to an end. They end no later than the ‘vesting day’. On vesting, the assets are then transferred to the Unit Holders.

On vesting two taxes apply:

1. Capital Gains Tax (CGT) (Federal Tax)
2. Transfer (Stamp) Duty (State Tax)

All Australian Unit Trusts suffer CGT and (stamp) transfer duty. Therefore, Unit Trusts try to defer this liability by making the Trust exist longer.

Unit Trusts lasting 80 years?

The Government does not want assets tied up in Trusts indefinitely. The Government seeks to prevent assets from falling into disrepair. A Trust can not go on longer than 80 years. This is called the Rule Against Perpetuity.

This Rule comes from English law. The 22nd Earl of Arundel in 1682, wanted to control how his titles pass for thousands of years. The Courts refused to grant an indefinite Trust. The Court limited the life of the Trust.

The 80-year Rule applies in all Australian States except one. South Australia has not adopted a Rule Against Perpetuities. Here, you do not need to have a Unit Trust lasting 80 years. They can exist indefinitely.

Don’t the Westfield Unit Trusts go forever?

There are two Westfield Trusts:

• Westfield Trust; and
• Westfield American Trust.

They are both Unit Trusts. The Unit Trusts are governed by New South Wales law.

Collectively they are worth AUS$58 Billion. Surely they can’t be subject to the 80-year period? Because the Trusts are governed by New South Wales they are subject to the Rule Against Perpetuities. Both Unit Trusts suffer the 80-year rule. The Westfield Unit Trust started in 1982. The Westfield American Unit Trust started in 1996. Both terminate on their respective 80th anniversary.

Unit Trust 80-year vesting period may be abolished – one day

Legal Consolidated continues to lobby the States and Territories to remove the rule of perpetuity. No doubt the lawyers for Westfields, and similar, are doing the same thing. There is a strong movement to abolish these rules.

If they are abolished then Legal Consolidated’s Unit Trusts, Family Trusts, Family Trust updates, and Bare Trusts are drafted to extend the vesting period to infinity. This is automatic if the law is abolished.

Want your Unit Trust to last longer than 80 years?

Under South Australian law, a Unit Trust can potentially exist indefinitely. When building a Trust Deed on Legal Consolidated put in a South Australian address for the Trustee. If you have no such address then put in: Care of General Post Office Adelaide, 141 King William Street, Adelaide SA 5000.

Example: The Australian Medical Unit Trust is located in Brisbane. There is concern that Unit Trusts lasting 80 years is not long enough to fulfil the Trust’s purpose. When they sign the Trust Deed they elect to have South Australia’s laws apply to their Trust. Now the Trust can exist indefinitely?

South Australia’s perpetuity rules: Blessing or curse?

Although South Australia may seem like a blessing, it could end up more like a curse. Here are the few issues you should be aware of if you don’t want your Unit Trust to last 80 years.

Example: The Australian Medical Unit Trust has operated for 80 years. The Trust is able to live on indefinitely. However, any Unit Holder can direct the Trustee to wind up the Trust.

In practice, choosing South Australia’s laws has little value. It’s usually more trouble than it’s worth. Any legal issues that arise are dealt with in South Australian Courts. You have to travel to South Australia and brief lawyers in that State. This is inconvenient and costly.

What does the Court state about a South Australian Unit Trust vesting in 80 years?

If you do make it to 80 years with no problems the Court may order the Trust to wind up anyway. There is no guarantee that a court gives effect to your choice of law: Akai Pty Ltd v The People’s Insurance Co Ltd (1996) 188 CLR 418.

This is especially true when the Trust has chosen South Australia to avoid the laws that otherwise apply.  Instead, they apply the State’s laws that have a close and real connection to the Trust.

Over the years we have set up many Trusts governed by the laws of South Australia. This escapes the Unit Trusts lasting 80 years rule. To date, we have not had an attack by the ATO regarding those Trusts.

Would the ATO argue that the choice of law was a breach of Part IVA Income Assessment Act (1936)? Part IVA is the general anti-avoidance provision. If you do something contrived primarily to reduce tax then the ATO disregards what you do and inflicts the tax you should pay.

Legal Consolidated’s view is that Part IVA is difficult for the ATO to sustain. There is no ‘scheme’ or convoluted array of activities. However, it is a threat.

Is South Australian Unit Trust the right choice for you?

Before choosing South Australia’s laws to govern your Trust, ask yourself these questions:

1. 1. Is there any nexus to South Australia?
   2. Is this connection artificial or contrived?
   3. Where is the asset located?
   4. Does the Trustee reside or carry on business in this location?
   5. Where is Management located?

In Summary about SA Unit Trusts:

• • You can build a Unit Trust under South Australian jurisdiction.
  • However, there is no guarantee the Court applies South Australian law to your Trust.

Thankfully most of us are dead before an 80-year Trust ends. So Unit Trusts lasting 80 years may not be an issue.

Using a Unit Trust as a Property Trust

A Legal Consolidated unit trust is an excellent vehicle for establishing a property trust, particularly due to its flexibility and structure tailored for group investments in real estate.

Structure and Functionality of a Property Trust

In a Legal Consolidated unit trust, the trust itself owns the property, and investors buy units in the trust. Each unit represents a share of the trust’s property assets. This structure allows multiple investors to collectively own and benefit from real estate, which might be less accessible individually due to high capital requirements.

Tax Efficiency of a Property Trust

Unit trusts are known for their tax-efficient distribution of income. Income generated from the property, such as rental income, is passed directly to unit holders, usually in proportion to the number of units they hold. For the investors, these distributions are treated as personal income, allowing them to take advantage of any tax benefits associated with their personal tax situations, such as offsetting losses against other income.

Example of a Property Trust (Commercial Property Syndicate)

A Legal Consolidated unit trust is a widely used structure for business or investment purposes, where each beneficiary holds a predetermined share of the trust’s assets. Beneficiaries of a commercial property unit trust are allocated a portion of both income and capital appreciation proportional to their ownership stake in the trust’s assets.

For example, consider a property investment that issues 1,000 units of a property unit trust, encompassing $10,000,000 worth of commercial real estate. If you acquire 10 units of this trust, you effectively hold a 1% ownership interest. This entitles you to a corresponding 1% of the income generated and the capital growth from the properties.

In scenarios involving a unit trust, also referred to as a commercial property syndicate, numerous investors pool their capital to invest in one or more properties held within the unit trust.

Six advantages of using a Unit Trust as a Property Trust (Syndicate)

A unit trust structure provides several advantages for investors in commercial real estate, including:

1. 1. Pooling of Funds: It allows investors to collectively pool their funds to purchase commercial real estate that would be otherwise too expensive for an individual to acquire alone.
   2. Income Distribution: It distributes pre-tax income to beneficiaries, where the income is then taxed according to the beneficiary’s personal income tax rate.
   3. Tax Minimization: It helps in avoiding significant tax implications typically associated with direct property ownership.
   4. Cost Sharing: It facilitates the splitting of large expenses involved in commercial property ownership among all investors.
   5. Regulatory Advantages: It is subject to a lower level of financial regulation, which can be beneficial. For example, some investors use a Self-Managed Super Fund to invest in commercial real estate trusts.
   6. Professional Management: Investors benefit from having a professional property management team that manages the investment from due diligence and acquisition to divestment.

When does the Unit Trust start?
When signed or when units are paid for?

Does a Unit Trust come into effect when the deed is signed? Or when the first Units are issued and paid for?

El-Cheikh v Miraki [2020] NSWSC 1781 is about when a Unit Trust starts to exist. (The appeals support this: El-Cheikh v Miraki [2021] NSWCA 271).

Facts of El-Cheikh v Miraki

• Two business associates decide to buy a property in NSW.
• They want to buy the property in a Unit Trust. They decided that a human would be the current Trustee of the Unit Trust. However, there is an expectation that a corporate trustee would later replace the human.
• The deed for the unit trust, however, is created with a company named as trustee. (Not a human as they first thought they would do.)
• Both parties accept that the Unit Trust deed is validly signed.
• They even went the extra mile to do a wet signature. And not rely on the silly and unworkable electronic signature rules.

Nevertheless one of the parties, later, argues that the Unit Trust never started!

• They agree that the Unit Trust deed is validly signed and dated.
• However, the subscription payments for initial units are never paid.

An Australian trust needs three things:

1. trustee
2. beneficiary (the object of the trust)
3. trust property (trust property)

As there is no initial payment for the units, there is no trust property. The Unit Trust never came into existence.

The Court confirms that:

“a trust does not exist at the time of the execution of the trust deed. It only comes into existence at the moment when the first unit holder subscribes [for] units and pays [the} subscription money”.

Instead of the Corporate Trustee of the Unit Trust buying the property, one of the individuals buys the property. Remember he was meant to be the ‘trustee’ of the Unit Trust. But that never happened.

But a Bare Trust is evidence of the person buying the asset for the trust

True. But the parties did not build a Bare Trust? There is nothing.

The Court’s verdict in El-Cheikh v Miraki:

To get a valid Australian Unit Trust:

1. build a Unit Trust on Legal Consolidated’s website
2. the Unit Trust is prepared as ‘Deed’ (not as an ‘agreement’)
3. do what the Unit Trust states: pay the subscription price and issue the Units
4. amend the Unit Trust as a Deed (not as an agreement)

Who pays tax on Unit Trust income – trust vs unit holder?

The High Court states in Charles v FCT [1954] HCA 16, 90 CLR 598 that the interposition of a unit trust between an income source and a beneficiary does not change the character or source of the income in the hands of the beneficiary. This is for tax purposes.

In my lecturing as a professor at a number of Australian Universities, since the 90s, I have named this the “trust conduit theory”. The term seems to now be widely used. My theory asserts that an amount distributed by the trustee to a beneficiary retains in the beneficiary’s hands the specific character. For example, as dividends or interest income. Therefore, it has the same source that it had in the trustee’s hands.

Consider:

• Syme v Commissioner of Taxes (Vic) [1914] UKPCHCA 6; 18 CLR 519
• Williams v Singer [1921] AC 65
• Baker v Archer-Shee [1927] UKHL 1; AC 844

Subsequent cases have limited my theory in its purest form to the point that saves in the case of a bare trust (eg, FCT v Tadcaster Pty Ltd (1982) 13 ATR 245) or a trust in which a beneficiary has an interest in possession in the income of the trust estate as it arises, it has not been embraced.

For example, in Executor Trustee & Agency Co. of South Australia Ltd v DCT (SA) [1939] HCA35; 62 CLR 545, Latham CJ rejected the argument in favour of the theory in its purest form based on Baker v Archer-Shee where the trustee, pursuant to the exercise of a discretion, and after the payment of fixed annuities to the beneficiaries, paid the whole of the surplus net income from the trust real estate to the same beneficiaries. In his Honour’s words (at 558):

“In view of the fact that a discretion exists, and that the exercise of it is interposed between the receipts of rents and profits of the land by the trustee and the payment of income to the beneficiaries, it seems to me to be impossible to hold that the latter are entitled specifically to the rents and profits”.

Charles is the high-water mark of the theory in Australia. That case involved a unit trust conferring on unitholders fixed entitlements. But even in the case of the unit trust before the Court, it is clear that their Honours only embraced my theory in a modified form. At 609, their Honours said:

“…a unit under the trust deed before us confers a proprietary interest in all the property which for the time being is subject to the trust of the deed: Baker v Archer-Shee; so that the question whether money’s distributed to unit holders under the unit trust form part of their income or their capital must be answered by considering the character of those moneys in the hands of the trustees before the distribution is made.”

Clearly, the Court did not go so far as to say that what was received by the unitholders was the actual income that the trustees received. The Court merely said that the character of the moneys received by the unitholders is determined by its character in the hands of the trustees. If it was a capital profit in the hands of the trustees, it was a capital profit in the hands of the unitholders. If it was a revenue profit in the hands of the trustees, it was a revenue profit in the hands of the unitholders.

But in that modified form, the theory does not of itself determine the source of the income. Other factors such as whether it is passive income or from the carrying on of a business and if the latter, where the business is carried on, the activities and functions of the trustees and the terms of the trust instrument impacts on the source of the income. This is in the hands of the unitholders as a practical, hard matter of fact: Nathan v FCT (1918) 25 CLR 183.

Unit trust income vs Family Trust income

Even more so in the case of a discretionary trust where a discretionary beneficiary (not being a taker in default) having no interest in the assets of the trust estate but merely a right to require the trustee to carry out the terms of the instrument constituting the trust estate, is only entitled if the trustee exercises its discretion in the beneficiary’s favour.

While Memec Plc v Inland Revenue Commissioners [1996] BTC 590, on appeal [1998] BTC 251 (CA) concerned the transparency of a German silent partnership in the sense of whether dividends paid by trading subsidiaries to the partnership of which the taxpayer was the silent partner were paid to the taxpayer, Robert Walker J considered by way of analogy whether a trust was transparent. After referring to Baker v Archer-Shee, his Lordship said (at 603):

“Under an English trust with an interest in possession the life tenant has an equitable interest in the trust property and the trust income as it comes into the trustee’s hands, even though the trustees have a lien on capital and accruing income for their expenses. Such a trust is transparent for income tax purposes. A discretionary trust, on the other hand, is not transparent. No beneficiary is entitled unless and until the trustees exercise their discretion in his or her favour, and the trustees’ exercise of discretion is regarded as having(in Lord Asquith’s words) independent vitality and creating a new source of income, although the effect of this may be tempered by specific enactment…”

Build your Unit Trust deed on our law firm website. Telephone us for help answering the questions.

After you build your Unit Trust deed you may wish to build a Unitholders Agreement.

Does the Unit Trust deed mention AASB15 “Revenue from Contracts with Customers”?

As of 1 July 2021, non-listed companies are no longer allowed to prepare Special Purpose Financial Statements (SPFs). Instead, they prepare the arduous General Purpose Financial Statements (GPFS). Small proprietary companies where 5% of their shareholders request GPFS to be prepared are included in the definition of companies that comply with this requirement.

This requirement also applies to SMSF, Trusts and Partnerships, but only where the founding Deed makes mention of AASB15 in its definition of income.

Happily, Legal Consolidated documents do not mention AASB15 in the definition of income.

Further, no Legal Consolidated documents require compliance with the arduous AASB15. 

Using a Unit Trust structure for property development

Many of Legal Consolidated’s Unit Trusts deeds are used for property development projects. This is across Australia. Legal Consolidated Unit Trust deeds allow for collective property investments. The Legal Consolidated Unit Trust pools money from multiple investors into a single fund. The Unit Trust’s Trustee (usually a company) manages the Unit Trust.

Structuring the investment as a Unit Trust provides the Self Managed Super Fund and other Unitholders with legal protections. It secures their invested capital.

How are Legal Consolidated property unit trusts set up?

Our Unit Trusts are created by a legal document called a trust deed. The trust deed is built on Legal Consolidated’s website. Our Unit Trust binds all the parties to the property development. The Trust Deed for property development:

1. outlines the purpose of the trust;
2. the rights and obligations of the trustee;
3. trustee’s power;
4. the rights and obligations of unit holders; and
5. identifies the various parties involved in the trust.

Before you build the Unit Trust Deed you need to build a special purpose vehicle (SPV) company. It acts as the trustee of the unit trust. This SPV is often named after the address of the development site.

What is the property investor getting in the Unit Trust?

When an investor invests in a property development, they are actually investing in a Unit Trust. Therefore, you get units in a unit trust. You become a Unitholder. The most common Unitholders for property developments are:

• Family Trust
• Yet another Unit Trust
• Self-Managed Super Fund
• Partnership
• Bare and Secret Trust
• Company
• Mum and Dad in their own right (not good for asset protection)

In other words, one of the above entities holds your units in the Unit Trust.

Each investor in the unit trust gets units. This is proportional to the amount of capital they invest. Similar to shareholders owning shares in a company, unit holders indirectly own their proportionate interests in an underlying property held by a unit trust.

If you invest 5% of the capital then you get 5% of the Units in that Unit Trust.  

Can any Legal Consolidated Unit Trust be used for property development?

All Legal Consolidated Unit Trusts are able to be used for property development. We do not change anything. 

Why are Legal Consolidated Unit Trust deeds so popular with property developers?

All Legal Consolidated Unit Trust deeds require that the trustee owes a duty of care to unit holders and beneficiaries within the Unit Trust. Our unit trust deeds require that the trustee acts in the best interests of the unit holders and beneficiaries at all times. If a trustee fails to do so, they can be held personally liable with civil and criminal penalties depending on the severity of their actions.

What are the tax benefits for a Legal Consolidated Unit Trust investing in property development?

We do not provide legal advice on the tax consequences. However, our unit trusts are preferred when it comes to investment property ownership. Our Unit Trusts have the ability to pass on any net cash profit from the property that represents non-cash depreciation and capital works deductions to the unit holders. These cash distributions (non-assessable amounts) usually reduce the cost base of the units. They also do not give rise to immediate tax consequences.

Property Development Company vs Legal Consolidated Unit Trust

Provided that the property has been held for at least 12 months, any capital gain derived on the property by a unit trust generally gets the 50% CGT discount. This is as long as the gain is not distributed to a company. Assuming a human unit holder is paying tax at a marginal tax rate of 47% (including Medicare) the effective tax rate on the discount capital gain is 47% x 50% = 23.5%.

Is a Unit Trust the best structure for property development?

Legal Consolidated does not give advice on which structure is best for you or your unitholders. You need to speak with your own lawyer, accountant and financial adviser.

Unit Trusts are the most popular structure. But no investment is entirely without risk. The Legal Consolidated Unit Trust seeks to minimise that risk as much as possible. This is by ensuring that an investor’s capital is secured against a tangible asset and that the trustee is acting in the best interests of investors at all times.

Can a Legal Consolidated Unit Trust used for property development borrow money?

Yes, the Unit Trust can borrow money. 

Can a Self-Managed Super Fund invest in the Unit Trust and borrow money?

While our Unit Trusts are used for this purpose we do not give advice on SMSF investing. We give no advice on SMSF gearing or borrowing money. We also do not provide the Bare Trust or Custodian Agreement.

Should a Unit Trust being used for property development also have a Unitholders Agreement?

Generally, yes. But we do not give legal advice. You need to speak with your accountant, financial planner and lawyer. However, from what we see most developers will also build a Unitholders Agreement.

Does Legal Consolidated give advice on property developments?

We do not give advice. You need to speak with your accountant, financial planner and lawyer. We cannot help you with that journey. We merely sell the Unit Trust deeds and the Unit Trust Holders agreement.

Can my property lawyer build a Legal Consolidated Unit Trust?

Most people building our Unit Trusts are themselves, lawyers. Lawyers can ‘white badge’ our Unit Trust deeds and Unitholders Agreements as part of the building process. We are specialists in trust structures. We do not practice in property law.

See also:

Stamp duty when you transfer business real property from a Unit Trust to a Self-Managed Super Fund

Tax-effective business structures

Extending a Unit Trust’s vesting date

How to windup and vest a Unit Trust