Learn To Invest
Stocks Special Reports LICs Credit Funds ETFs Tools SMSFs
Video Archive Article Archive
News Stocks Special Reports Funds ETFs Features SMSFs Learn


What is a fixed trust and why do you need to know?

Michael Hallinan  |  18 Jan 2017Text size  Decrease  Increase  |  

Page 1 of 1

Whether a trust is a fixed trust or not has significant taxation implications for SMSFs, as Michael Hallinan of Townsends Business & Corporate Lawyers explains.


Whether a trust is a fixed trust or not has significant taxation implications.

In relation to tax losses, if the trust is not a fixed trust it will have more stringent tests to satisfy before the tax losses can be claimed as a deduction.

In relation to superannuation taxation, if a super fund invests in a trust which is not a fixed trust, then trust distributions to the superannuation fund may be taxed at 47 per cent and not at the concessional tax rate of 15 per cent which applies to superannuation funds.

Many taxpayers identify fixed trusts with unit trusts and therefore assume that if the trust is a unit trust it is necessarily a fixed trust. Unfortunately, this is not the case.

The tax laws have a very precise and restrictive definition of a fixed trust. Essentially, every beneficiary must have fixed entitlement to the income and capital of the trust, and that fixed entitlement must not be able to be defeated, removed, or adversely affected by actions of the trustee or any third party.

This definition is so restrictive that almost all unit trusts would not qualify as fixed trusts. Fortunately, tax law allows the commissioner a discretion to treat unit trusts as fixed trust.

New draft guidelines have now been issued as to the attitude the commissioner is likely to take in relation to typical aspects of unit trusts which, strictly, will cause them not to satisfy the very strict definition.

The new guidelines provide some assurance that the commissioner will provide practical accommodation to treat unit trusts as fixed trusts.

For example, a power to issue new units will not disqualify a unit trust as a fixed trust if the new units can only be issued at net market value.

A power to redeem units (without the consent of the unitholder) will not disqualify the unit trust as a fixed trust if the redemption occurs at net market value and is in the best interests of the unitholders.

While some comfort can be taken from the guidelines, it's important to understand that unit trusts are not automatically fixed trusts for income tax purposes.

If there is a significant risk that the trust will incur tax losses (for example, in the initial years of operation) or, if an investor is likely to be a superannuation fund, then the terms of the trust deed must be carefully drafted to minimise the risk that the unit trust is not a fixed trust and to reduce the need to rely on the commissioner favourably exercising his discretion: what Caesar confers, Caesar can take back.

More from Morningstar

• Quantifying the impact of assets test changes on your retirement

• How SMSFs should plan for $1.6m pension cap


Michael Hallinan is special counsel, superannuation, at Townsends Business & Corporate Lawyers. This is a financial news article to be used for non-commercial purposes and is not intended to provide financial advice of any kind. Opinions expressed herein are subject to change without notice and may differ or be contrary to the opinions or recommendations of Morningstar as a result of using different assumptions and criteria.

© 2016 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.