To Fix or Not to Fix

Emily Pritchard, current as of: 10 April 2024.

There is no doubt that trusts play an integral role in business and investment structuring, offering asset protection, tax planning flexibility and succession mechanisms. Amongst the many different types of trusts that can be used, unit trusts feature prominently, however within the realm of unit trusts there are multiple, nuanced variations. Terms such as “fixed”, “non-fixed”, “special”, “fixed for tax purposes” and “fixed for land tax purposes” are often used to categorise some of these variations. And while they all share similarities, they also possess distinct characteristics that can significantly impact structuring strategies and outcomes. 

Unit Trusts 

A unit trust is a trust in which there is an equitable obligation on a person or company (trustee) to deal with property (trust property) for the benefit of beneficiaries (unit holders). The unit holders hold defined entitlements to the income and capital of the trust, referred to as units.  

Unit trusts are commonly used for unrelated parties to pool their funds for business or investment ventures. A non-fixed unit trust might allow the trustee to issue varying classes of units with different rights attaching to each class, similar to different share classes in a company. Other unit trusts, such as some fixed unit trusts, might be far more restrictive in terms of the trustee’s discretions (or lack thereof) to distribute income and capital of the trust. 

It is the distinct characteristics of different unit trusts that determine if the trust and/or its unit holders, enjoy various tax benefits. Unit trusts are not always fixed trusts and fixed unit trusts are not always fixed for land tax purposes.  

Fixed Unit Trusts for Tax Purposes 

There are potential tax benefits of using a unit trust that qualifies as a fixed trust for tax purposes.  It will generally be easier for the trust to carry forward losses and qualify for certain CGT concessions. It will also generally be easier for unit holders to claim borrowing costs associated with acquiring units and franking credits if they receive dividends from underlying investments. 

The Income Tax Assessment Act 1936 (Cth) (ITAA) stipulates that a trust is a fixed trust if persons have fixed entitlements to all of the income and capital of the trust. Unit holders will be classified as having that fixed entitlement to the income and capital if they have a vested and indefeasible interest in a share of income or capital of the trust.  

Whilst the legislation makes it seemingly difficult to establish a fixed entitlement with certainty, the ITAA does provide the Commissioner with the discretion to deem that a unit holder has a fixed entitlement, having regard to: 

  • the circumstances in which an entitlement is not vested and indefeasible; 
  • the likelihood of the entitlement not vesting or the defeasance happening; and 
  • the nature of the trust. 

Further, PCG 2016/16 outlines the factors the Commissioner will consider when deciding whether to exercise the discretion to treat an interest in the income or capital of a trust as being a fixed entitlement and outlines a safe harbour compliance approach for trustees.  

Fixed Unit Trusts for NSW Land Tax Purposes 

In New South Wales, for a unit trust to enjoy the benefit of the land tax-free threshold of $1,075,000 (for the 2024 land tax year), it needs to qualify as a fixed trust in accordance with the Land Tax Management Act 1956 (NSW) (LTMA). The LTMA stipulates that if a trust satisfies relevant criteria, the trust is taken to be a fixed trust and therefore enjoys the benefit of the land tax-free threshold. 

The relevant criteria to be satisfied for a unit trust to be classified as a fixed trust for NSW land tax purposes are: 

  • the trust deed specifically provides that the beneficiaries of the trust: 
    • are presently entitled to the income of the trust, subject only to payment of proper expenses by and of the trustee relating to the administration of the trust; and
    • are presently entitled to the capital of the trust, and may require the trustee to wind up the trust and distribute the trust property or the net proceeds of the trust property, 
  • the entitlements referred to above cannot be removed, restricted or otherwise affected by the exercise of any discretion, or by a failure to exercise any discretion, conferred on a person by the trust deed. 
  • there must be only one class of units issued. 
  • the proportion of trust capital to which a unit holder is entitled on a winding up or surrender of units must be fixed and must be the same as the proportion of income of the trust to which the unit holder is entitled. 

It is important to note that even when a trust satisfies the relevant criteria, the full benefit of the land tax-free threshold might not always be received. This occurs where a fixed trust for NSW land tax purposes has non-fixed (“special”) trust unit holders. In these situations, the special trust unit holder/s would be taxed (as secondary taxpayers) on their proportion of the unit holdings, without the benefit of the land tax-free threshold. 

Effective Structuring  

It can be surprisingly easy to confuse the different types of unit trusts and fixed trusts, leading to potentially damaging and costly outcomes for trustees and their advisors.  As always, our team is here to help, so feel free to contact us to discuss setting up new trusts and amending existing trusts to ensure structuring strategies achieve desired outcomes.