Part six of Nexia’s series on capital gains tax (CGT) and the proposed 30% minimum tax on trustees of discretionary trusts
Throughout this series, we’ve explored how the proposed tax reforms could affect discretionary trusts, bucket companies and family wealth structures.
Another question we’re increasingly hearing from investors and business owners is:
“What about my unit trust?”
The answer depends largely on how the trust is classified under the proposed rules.
Based on the current rules, many unit trusts may be treated more favourably than traditional discretionary trusts because they are more likely to fall within an expanded definition of a fixed trust. However, not all unit trusts are the same, and some structures may require careful review.
The key issue is whether the trust is ultimately classified as fixed trust or discretionary trust under the proposed rules.
Why are unit trusts attracting attention?
Historically, the distinction between a fixed trust and a discretionary trust has not always been front of mind for investors.
The proposed 30% minimum tax on discretionary trusts may change that.
Much of the concern surrounding the proposed trust tax relates to discretionary trusts and the ability to distribute income flexibly among beneficiaries. Unit trusts generally operate differently, with unitholders holding entitlements based on the number of units they own.
Rather than beneficiaries receiving distributions at the discretion of a trustee, unitholders generally have fixed entitlements based on the number of units they own.
Because of this, many advisers expect unit trusts to be better positioned under the emerging framework than traditional discretionary trust structures.
What is a fixed trust?
In simple terms, a fixed trust is one where beneficiaries have fixed rights and entitlements to the income and capital of the trust, as set out in the trust deed.
A unit trust is a common example.
If you own 25% of the units in a trust, you typically have a corresponding entitlement to 25% of the income and capital of that trust, subject to the trust deed.
This differs from a discretionary trust, where the trustee has the ability to determine how income and capital are distributed among beneficiaries.
The significance of this distinction appears to be increasing under the proposed reforms.
Does that mean all unit trusts will be treated as fixed trusts?
Not necessarily.
While many unit trusts may be classified as fixed trusts, the outcome will ultimately depend on the specific provisions of the trust deed and the overall design of the structure.
Some arrangements contain discretionary elements that can blur the distinction between a fixed trust and a discretionary trust. Others may have evolved through amendments, restructures or changes in ownership.
As a result, describing a structure as a “unit trust” may not, by itself, determine how it will be treated under the proposed framework. The underlying legal structure will remain important.
Hybrid structures may require particular attention
Hybrid trusts contain characteristics of both fixed and discretionary trusts.
While these arrangements may provide additional flexibility, they can also create greater uncertainty when assessing how the proposed rules apply.
Questions may include:
- Are the beneficiaries’ rights genuinely fixed?
- Does the trustee retain discretionary powers?
- Have previous amendments altered the trust’s character?
- Would the structure satisfy the proposed fixed trust requirements?
The answers are likely to depend on the specific facts of each case.
For this reason, hybrid structures may warrant a more detailed review than standard unit trust arrangements.
Why classification matters so much
Across all of the proposed reforms, a recurring theme has emerged:
Classification drives outcomes.
Whether a trust is ultimately treated as a fixed trust or a discretionary may influence:
- Exposure to the proposed 30% minimum tax on discretionary trusts
- Future distribution strategies
- Restructuring opportunities
- Long-term tax outcomes
- Planning decisions for future generations
For some families and investors, the most valuable exercise may not be changing structures immediately but gaining certainty around how their existing structure is likely to be classified.
The focus should be understanding your structure
That means the objective for many investors is not to rush into restructuring, but rather to understand where they currently stand.
If you operate through a unit trust, now is a good time to revisit:
- The trust deed
- The rights attached to units
- Any historical amendments
- Whether discretionary powers and features exist
- How the structure fits within your broader wealth strategy
Unit trusts may be better positioned, but review is still important
Current discussions suggest that many unit trusts may be less exposed to the proposed 30% minimum tax than discretionary trusts because they are more likely to qualify as fixed trusts.
However, not every unit trust will fit neatly into that category.
The structures likely to attract the greatest scrutiny are those with hybrid characteristics, unusual distribution provisions or features that make classification less clear.
As with every article in this series, the key message is that understanding your structure early creates more options than reacting later.
How Nexia can help
If you own investments, property or business interests through a unit trust, now may be an ideal time to review how your structure could be treated under the proposed reforms.
A proactive review today could help provide greater certainty and flexibility for the future.
Speak with your local Nexia Advisor to understand how the proposed reforms may affect your structure and long-term planning objectives.
Important: This article is based on legislation and draft rules as proposed at the time of writing. Future government policy, legislation and the outcome of the next Federal Election may result in changes. The information provided is general in nature and should not be relied upon as a substitute for professional advice. Please seek advice tailored to your individual circumstances.
