Beware tax laws around fixed trusts
Whether a trust is a fixed trust or not can have significant tax implications in relation to tax losses and superannuation tax, and tax laws have specific and restrictive definitions of a fixed trust.
Such was the warning from Townsends Business and Corporate Lawyers which said many taxpayers correlated fixed trusts and unit trusts and assumed that if the trust was a unit trust it must also be a fixed trust. The law firm said this was not the case.
Special counsel, superannuation, Michael Hallinan, said definitions under tax laws were so restrictive that almost all unit trusts would not be classified as fixed trusts.
"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," Hallinan said.
In relation to tax losses, if the trust is not a fixed trust, it will have more restrictive tests before tax losses could be claimed as a deduction. If super funds invest in a trust that is not a fixed trust, then trust distributions to the super fund may be taxed at 47 per cent and not at the concessional tax rate of 15 per cent that applies to super funds.
"Fortunately, tax law allows the commissioner a discretion to treat unit trusts as fixed trusts," he said.
New guidelines have been issued, which provide some comfort that the commissioner would take a practical approach when deciding whether unit trusts should be treated 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," Hallinan said.
It is important to draft the trust deed to minimise risk that the unit trust was not a fixed trust if there was significant risk the trust would incur losses or if the investor was a super fund so as to reduce the need to rely on a commissioner, he added.
AUTHOR
Malavika Santhebennur
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