Unit Trust DeedThis Unit Trust Deed creates a unit trust and appoints a trustee to the unit trust. In this unit trust the trustee is also the manager of the trust.
You MUST seek advice from a qualified professional before using this deed to check that it meets your specific circumstances. It is important to understand the state and territory laws regarding stamping and lodging your deed to ensure that it is effective in establishing a trust. A stamp duty may be payable to the relevant revenue authority in your state or territory.
A Unit Trust Deed is a document that is required in order to establish a unit trust. This type of trust is characterised by the clear and fixed benefit it provides to its beneficiaries. ‘Unitholders’, who are the beneficiaries in a unit trust, own a set number of units in a similar fashion to shareholders in a company. The number of units they hold is then used to determine the benefit they receive from the trust. This substantially differs from a discretionary trust where the trustee has the ability to decide who receives the benefit and the amount they will get. Unitholders in a unit trust are also able to sell the units they own quite easily. This form of trust is a popular option given the transparency it provides and the removal of discretion in the benefit allocation process.
A Unit Trust Deed sets out the roles of the key parties within the trust, as well as the powers and rights they will be afforded. In addition, the administrative processes that occur in the function of the trust will also be detailed.
What does this Unit Trust Deed Cover?
- Formation of the trust
- Identities of parties
- Beneficial interest of unitholders
- Classification of units
- Register of unitholders
- Transfer of units
- Distribution of income and capital
- Appointment/removal of trustee
- Meetings of unitholders
- General powers
This precedent is not adapted for use as a security. If use of trust for security is proposed, there are many additional issues including the application of the Personal Property Securities Act 2009 (Cth).
There are various ways a unit trust may be constituted, some involving the appointment of a separate manager. In this precedent, the role of the manager is joined with that of the trustee. A unit trust created by this precedent is constituted by a deed between a trustee and the "initial unit holder" who contributes an amount of money which establishes the trust and creates units held by the initial unit holder. Thereafter, units can be issued to the other investors.
This method of constituting a unit trust ensures there is a trustee, trust property and a beneficiary, and avoids problems surrounding the definitions of "company" and "partnership" in section 995-1 of the Income Tax Assessment Act 1997 (Cth). Under section 601ED of the Corporations Act 2001 (Cth), a unit trust must be a registered managed investment scheme if there are more than 20 unit holders (see clauses 4.5(b) and 4.6).
Throughout, the precedent provision is made to enable the person drafting the deed to tailor the deed to the particular needs of the parties by requiring the holders of not less than a certain percentage of units to consent to or initiate various actions. Clear instructions should be obtained in drafting these clauses; ie optional provisions in 7.1(c), 8.2 and 20.6 and inserts for the Initial Amount definition in clause 1 and in clauses 7.1, 7.2, 8.2, 13.3, 14.1(b), 14.1(c), 15.1(d), 17.2, 18.1, 18.2, 18.5, 18.9, 22.1(a) and 23.4(c). External unit holders may also require a shareholding and perhaps a directorship in the trustee, and/or a combined unit holders and shareholders agreement to regulate further the affairs of the trust and trustee including obligations to provide loans, capital, guarantees, restrictions on external interests and rights on default.
As to the investment of trust funds, see clause 20.
Unit trusts originally were mainly used in the investment field but their modern use expanded so much they were at one stage, prior to the introduction of dividend imputation, the most common vehicle through which business was conducted in the non-public company arena. The flexibility of a unit trust often results in its choice as the preferred structure for many commercial ventures where the units are often held by the trustee of each investor's family discretionary trust.
As to supporting documents with respect to the issue of units etc, see precedents “Resolutions of directors of trustee (a company) to establish a unit trust”, “Application for units in unit trust”, “Resolutions of directors of initial unit holder (a company) to execute unit trust deed”, “Resolutions of directors of company applying for units in unit trust”, “Unit trust certificate”, “Transfer of units”, “Unit trust records” and “Form of consent of unit holders of unit trust to acquisition of an investment”.
Should the unit trust be a fixed trust for tax purposes?
Tax advice should be obtained in relation to the suitability of this trust deed and the unit trust structure in general for the client’s purposes, particularly following the issue of the ATO’s Practical Compliance Guideline PCG 2016/16 with respect to classification of a unit trust as a fixed trust for taxation purposes – see introductory note to precedent “Amendment to convert unit trust to a fixed trust for tax purposes”. Note that it is possible to combine this with the NSW land tax precedent “Amendment to unit trust deed for NSW land tax purposes” – see note to this effect within item 14 of the drafting changes.
NSW land tax issues
Unit trusts in New South Wales may not receive the benefit of the land tax threshold unless the trust is a “fixed trust” under the Land Tax Management Act 1956 (NSW). If it is intended that the trustee of the unit trust will hold land in NSW and it is advantageous for the unit trust to be a fixed trust for NSW land tax purposes — see introductory note to “Amendment to unit trust for NSW land tax purposes”. Note that it is possible to combine this with the fixed trust for tax purposes precedent “Amendment to convert unit trust deed to a fixed trust for tax purposes” — see note to this effect within item 14 of the drafting changes.
Bamford case issues
There have been significant developments in the law relating to trusts, including the decisions in Commissioner of Taxation v. Bamford; Bamford v. Commissioner of Taxation  HCA 10 CaseBase document for this case and Colonial First State Investments Ltd v Commissioner of Taxation  FCA 16 and the introduction of the CGT and franking credit attribution rules in Subdivisions 115-C and 207-B of the ITAA 1997. In the light of the Bamford decision and the ATO’s draft Taxation Ruling 2012/D1 (the ATO has advised that no final version will issue while the Government is looking at reform of the law in this area), from 2018 the precedent has been amended to exclude “notional income” and “notional expenses” (as the Commissioner describes them in TR 2012/D1) from the definition of “income” in the unit trust deed. The trust deed permits the trustee to include or exclude an amount as income in a particular financial year by a resolution made prior to the end of the relevant financial year — see clause 11.7. As the trust deed contains an income equalisation clause, a decision of the trustee to distribute “income” must be made on or prior to 30 June in the relevant financial year — see ATO fact sheet QC 25912.
Relevance of particular provisions of the trust deed
Specific comments regarding the unit trust deed precedent:
- Initial unit holder. The Initial unit holder should be a natural person or company who will provide the initial amount to establish the unit trust. The trustee cannot be a unit holder: see clause 4.5.
- Trustee. The trustee may be one or more of a company or a natural person or a combination of them. A private company, having no activity other than to act as trustee, is often preferred, as it overcomes problems occurring on the death or illness or absence for prolonged periods of a natural person eg a registered proprietor of land. Care should be taken in allocating the shareholding of the trustee company: see clause 14.1(b). Care should also be taken in selection of a trustee to prevent possible conflicts of interest in relation to property or income of the trust. A unit holder cannot be appointed as the trustee: see clause 14.2. If a company is to act as trustee of more than one trust or as part of a business, consideration should be given as to whether a financial services licence is required.
- Definitions — clause 1.1: Initial amount. Stamp duty may be assessed on the amount of the initial amount and for this reason a nominal amount of, say, $50 is usually chosen but even this amount may attract no stamp duty or special stamp duty of up to $500 (section 58 of the Duties Act 1997 (NSW)) depending on the state or territory. Onerous stamp duty consequences can arise if the trust deed provides for the acquisition or settlement of specific property or if the Trust has assets of value at the time of execution of the trust deed. Larger amounts may be contributed to the trust fund by the later issue of additional units.
- Governing law — clause 1.3. If South Australia is the governing law under clause 1.3, in view of abolition of rule against perpetuities in that state (see sections 61 and 62 of the Law of Property Act 1936 (SA)), consideration should be given to removing reference to the rule against perpetuities throughout the deed and removing or changing the 80 year limitation in clause 22.1.
- Name of the trust — clause 2.1. A trust is not a legal entity and is named only as a convenient way of subsequently identifying or referring to it.
- Additional units — clauses 4.1 and 4.5. Additional units may be issued to the initial unit holder or new unit holders by means of the procedure described in these clauses.
- Classification of units — clause 4.3. Special classes of units are preferably created by specific provisions in the trust deed, but the procedure contained in this sub-clause may be utilised to bring class units into existence in which event the register of unit holders must be carefully maintained. Note that if the unit trust deed is to contain the variations set out in precedent “Amendment to unit trust deed for NSW land tax purposes” with respect to NSW land tax or precedent “Amendment to convert unit trust deed to a fixed trust for tax purposes” with respect to a fixed trust for tax purposes, this clause 4.3 and all references to class rights need to be stripped out of the deed.
- Restriction on number of unit holders — clause 4.6. Section 601ED(1) of the Corporations Act 2001 (Cth) requires a managed investment scheme to be registered if the scheme has more than 20 members.
- Redemption of units — clause 7. The procedure where units are able to be redeemed is an important and often useful aspect of a unit trust and the provisions of this clause should be brought to the attention of the parties to the deed. If the assets of the trust include real estate, stamp duty advice should be obtained to ascertain whether a redemption triggers land rich or landholder duty.
- Redemption without the request of a unit holder — clause 7.2. If this power of the trustee to redeem units is to be restricted, amend this clause to insert the restrictions.
- Calculation of unit price — clause 7.3. As to the valuation of units, see E S Gordon Pty Ltd v Idameno (No 123) Pty Ltd (1994) 15 ACSR 536 CaseBase document for this case. In the precedents “Amendment to unit trust deed for NSW land tax purposes” and “Amendment to convert unit trust deed to a fixed trust for tax purposes”, a special definition of unit price has been inserted for the purposes of those precedents.
- Transfer of units — clause 8. If it is not desired to have a pre-emption clause, delete clause 8.5 otherwise complete the sale price definition within sub-clause 8.5(a).
- Categories of Income and Capital — clause 11. See Taxation Ruling TR2012/D1 and the introductory notes above.
- Distribution of Income to unit holders — clause 10.2(b). If money due to a company unit holder is credited in the books of the unit trust, this may constitute an unpaid present entitlement to which division 7A of the Income Tax Assessment Act 1936 (Cth) may apply. The normal recommendation to prevent division 7A from applying is to pay out the money due from the unit trust to the company unit holder but mere book entries by the trustee in such circumstances do not fall within the concept of payment nor could the making of such a credit properly be regarded as a loan or even as an advance: see Euroasian Holdings Pty Ltd v Ron Diamond Plumbing Pty Ltd (in liq) (1996) 19 ACSR 234 CaseBase document for this case where it was held that the rights of the beneficiary in that case did not arise in debt or contract but were enforceable in equity only.
- Power to appoint and remove trustee — clause 14.1. Instructions should be obtained specifically with respect to who is to have the power of appointment of a new trustee.
- Restriction on appointment — clause 14.2. A unit holder cannot become a trustee due to the need to avoid a conflict of duty and potential stamp duty problems.
- Exercise of power of appointment — clause 14.5. See precedent “Deed of appointment and retirement of trustee”. The exercise of the statutory power of appointment in NSW and the ACT only must be by registered deed: see section 6(1) of the Trustee Act 1925 (NSW) and (ACT). In states and territories having the equivalent to subsections 6(10) and (13) of the Trustee Act 1925 (NSW), an appointment of a new trustee under and in accordance with the terms of an express power to that end in the trust instrument will be effective even though the appointment has been effected by an unregistered deed. Despite this in NSW and the ACT, third parties, such as lenders who are required to rely on the instrument of appointment of the new trustee, often insist on the appointment being effected by a registered deed pursuant to the statutory power to achieve two objects: first, to remedy any deficiency in the power of appointment in the trust deed and secondly, as evidence of the vesting of trust assets in the new trustee by relying on section 9(1) of Trustee Act 1925 (NSW), which provides: "Where a new trustee is appointed, the execution and registration of the deed of appointment shall without any conveyance, except as otherwise provided in this section, vest in the persons who become and are the trustees for performing the trust, as joint tenants and for the purposes of the trust, the trust property for which the new trustee is appointed". In most cases the execution and registration of a deed in the suggested form will not transfer the legal title to the new trustee. For land, the applicable land titles office will also require a special form to be completed and lodged with the title. Appropriate forms of transfer expressed to be pursuant to the deed are also needed for other property such as shares and bank accounts. For shares in a company, the requirements of the constitution of the company will need to be satisfied to register a transfer. For choses in action, the outgoing trustee should also give notice of the transfer to the new trustee to the debtor or other party.
- Meetings of unit holders — clause 18. Unit holder participation in, and control over, the administration of the Trust should be kept to a minimum.
- Limitation on liability of unit holders — clause 19. Compare with clause 17.4.
- Investment powers — clause 20. The Trustee Acts for all states have adopted the "prudent person" approach to investment powers but only NSW and the ACT have a section 14C(3) exclusion type provision — see clause 20.6 — and the drafts person should give consideration as to whether to include such a prohibition or not. Before drafting this clause, a practitioner should read the relevant sections in the Trustee Act of the state or territory dealing with investment of trust funds applying to the trust deed and note that section 14C(3) of the Trustee Act 1925 of NSW and ACT is not available in other jurisdictions and a decision needs to be made whether or not to delete clause 20.6.