Tuesday, July 11, 2017

Fixed trusts – what exactly are they?

View Blog Fixed trusts – what exactly are they? by Matthew Burgess

A recent post explored some threshold issues around the distinctions between unit trusts and fixed trusts (see - Unit trusts and fixed trusts).

Whether a unit trust is in fact a fixed trust is an area that has been the subject of significant uncertainty.

In 2016, the Tax Office did release Practice Compliance Guidelines on its view of what is a fixed trust. Unfortunately, the release by the Tax Office is problematic for at least three reasons, namely:
  1. it only considered the meaning of ‘fixed trust’ for the purpose of the trust loss provisions under the Tax Act; 
  2. the drafting approach of the Tax Office is non-definitive; in other words the Tax Office confirms it will retain the discretion to deem a trust not to be fixed despite what it sets out in the guidelines; 
  3. furthermore, the guidelines are not themselves binding on the Tax Office. 
Subject to the above comments, broadly it seems to be accepted that the following factors will be relevant to supporting that a trust is a fixed trust: 
  1.  the trustee cannot create different rights or different classes of units; 
  2. all units on issue must have the same rights to receive income and capital of the trust; 
  3. units must be allotted for market value; 
  4. all income and capital of the trust must be distributed in proportion to the unitholdings, i.e. there is no discretion held by the trustee; 
  5. partly paid units cannot be issued; 
  6. the trust deed requires all unitholders to agree on the redemption of units and any redemption must be at market value; 
  7. all valuations of the trust fund, and in turn the determination of unit values, must be conducted by a valuer in accordance with ‘applicable Australian accounting principles’; 
  8. the trustee cannot make gifts;
  9. the unanimous consent of all unitholders is required to vary the trust deed and the variation power should prohibit amendments to any of the above provisions.
The above post is based on an article originally published in the Weekly Tax Bulletin.

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