Continuing from our previous series where we looked at buying property in a discretionary trust, we will discuss the major advantages of using a unit trust when buying property.
A unit trust, also known as a ‘fixed trust,’ involves a predetermined proportion or allocation of units which are available to be purchased and sold by a person (known as a Beneficiary). Owning a Unit in a Unit Trust is like owning shares in a company except they have a very different tax treatment. There are also significant Land Tax differences as a Unit Trust can generally avail itself of the Land Tax threshold, contrary to a Discretionary trust. The trust is established by a document called the ‘trust deed’, setting out the terms of the trust – it is at this time the Settlor will decide the total amount of units to be held on trust. It is only by amendment of the trust deed that the total units can be changed.
The key characteristics of a unit trust include:
- They can be either a listed or unlisted unit trust;
- A unit holder will hold a fixed unitholding;
- The original value of funds held in trust will change as the asset/s value fluctuates with the market;
- Any property held will confer the Beneficiary proprietary rights according to the units they hold;
- Any trust income and capital distributed from the trust will be allocated to the Beneficiary according to the units they hold. Listed unit trust is also known as a public unit trust, where investors can buy and sell units within the trust.
A typical example is a Real Estate Investment Trust (REIT) listed on the Australian stock exchange (ASX) where the Trustee will buy and sell property assets on behalf of the unit holders (the investors). Unlisted unit trust is a private trust, this means a person cannot easily buy into or sell out of a unitholding to the public marketplace. This means the unit holders are typically invited to be a part of the trust. An example is McDonald Johnson Unit Trust which could own the commercial property in which we conduct our business operations.
While not every unit trust will buy property, it can be a very useful investment vehicle when buying property offering some distinct advantages:
- It allows funds to be pooled together from multiple parties, to buy one or more properties;
- The control and management of the trust can be outsourced to professionals;
- Any associated expenses and fees will be paid by all unit holders;
- Unit holders can buy and sell to other parties without selling the property; and
- Various tax benefits may result from distributing all or part of the trust’s income, distributing income which is described as a ‘specific capital gain’ and distributing non-assessable amounts.
One downside, however, is that a unit trust does not enjoy the benefit of asset protection like a discretionary trust or the unique discretionary element when distributing income to beneficiaries for tax minimisation.