Industry Focus

INDUSTRY INVESTMENT the trust is not fixed, income distributed to SMSF unitholders may be considered to be non-arm's length income under tax legislation and may incur a higher tax rate. In addition, unitholders requiring certainty that the unit trust is fixed will find themselves in a more restrictive structure. The flexibility of the structure may be unintentionally compromised as a result of a requirement to meet the ATO's fixed trust requirements. This may not be what all unitholders require and may give rise to competing unitholder interests from the outset. Some of the suggested requirements for the trust deed of a fixed unit trust may not be easy for the investors to accommodate. For example, a clause in a trust deed requiring unanimous approvals in certain circumstances is often unworkable, especially when there are a large number of unitholders involved. What does it mean for you? participate in the property investment. The terms and conditions of each specialist's investment (including their rights to share in the profits, capital gains and management of the property investment) are defined by the trust deed. In an environment where people are frequently setting up and using SMSFs for investment purposes, particularly when commercial property is concerned, the question as to whether a professional should invest in a unit trust using his or her SMSF is a common one. The issue There are various types of unit trusts, each treated differently for tax purposes. This can have implications for SMSF investors who need to comply with strict investment rules. For Australian Tax Office (ATO) purposes, a unit trust can be fixed or non-fixed. While the tax law provides a number of benefits to unitholders (including SMSF unitholders) where a unit trust is fixed, the ATO only recognises certain trusts as fixed trusts. A trust is a fixed trust if unitholders have fixed entitlements to all of the income and capital of the trust. A unitholder has a fixed entitlement if they have a 'vested and indefeasible' interest in income and capital. As the terms 'vested' and 'indefeasible' are not defined within the current tax legislation, there is ambiguity as to whether a unitholder has a fixed entitlement. The problem is that many private unit trusts do not meet the current criteria for a fixed trust notwithstanding that they may have been operating for many years as if they were fixed. There are a number of implications for unitholders (particularly SMSF investors) for existing unit trusts where the unit trust is not considered by the ATO to be fixed. The implications The current position on what will or will not be deemed a fixed trust is unresolved for the time being. If the ATO considers a unit trust to be non-fixed: (a) a trustee will not be able to pass on franking credits to the unitholders if it receives franked dividends; (b) if there is a loss, it will be subject to more stringent rules under the loss trust provisions (unless a family trust election can be made)—losses may not be able to be carried forward; (c) it may not be possible to deduct borrowing costs incurred in buying units in the trust; and (d) where a unitholder is an SMSF and Given the uncertainty regarding fixed trusts and the definition of vested and indefeasible interests, as well as the increase in SMSF investment in such structures, it is strongly recommended that any health professional considering investing in a unit trust structure obtain legal, accounting and financial advice prior to entering into any arrangement. A collaborative approach from these advisers will ensure that the financial and legal objectives of all parties can be ascertained. If there is a likelihood of franked dividends, trust losses and SMSF investors (who must ensure that all arrangements can be justified on arm's length terms) then a fixed unit trust must be considered, balanced of course with the overall commercial intentions of the parties, as it is these parties who have to work within the governing trust deed. Consideration must also be given to succession planning and future investors to the venture. The trust deed must be flexible enough to allow for the entry and exit of unitholders. Without full and proper consideration of these issues, it is possible that you will end up with an investment that is unable to be utilised to its best tax advantage. Heather Beckingsale (LLB (Hons) BSc) is a Senior Associate in the McCarthy Durie Lawyers commercial team in Brisbane. Heather has been working in commercial law (and its associated areas of corporate and property law) for more than 10 years. Given her experience in a wide range of commercial matters, Heather is able to provide a holistic approach to her clients' commercial and personal situations. Heather is a Queensland Law Society Accredited Specialist in Business Law. Healthcare • Issue 3 7

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