Legal Tip 326: Do Unit Trusts Need a Settlor?

Discussion in 'Legal Issues' started by Terry_w, 2nd Feb, 2021.

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  1. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    I learned this from a recent podcast. There is an issue with unit trusts that are set up yet don’t hold any property immediately.

    A trust is defined as someone holding property for someone else with equitable obligations. If there is no property there is no trust.

    This could mean a purchase of property is not held on trust.

    Example

    Homer sets up Ho Pty Ltd to act as trustee of the Homer Unit Trust. There is no settlor. The company is set up first and then documents for the trust are signed. But there is no subscription for units of the trust.

    A property is found and the company executes the contract of sale, purportedly as trustee of the Homer Unit Trust. The trouble is this trust does not exist. There are just some signed documents but no trust as there was no property.

    Homer later has the paperwork issued for the subscription of units and cash is handed over to the trustee for these.

    The question is, does Ho Pty Ltd hold the property on trust? No it couldn’t as the trust failed.

    The second question is, Does Ho Pty Ltd thereafter hold the property on trust? I don’t think it could be argued that it does because it didn’t before and there was no declaration of trust.

    The third question is will this trigger double duty? I think it could, depending on when the problem was fixed. If the trust was declared after the contract of sale was entered this could trigger duty in NSW and QLD.
     
  2. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Generally there are two common approaches used by most legal doc providers and solicitors. Excepting specific legal advice a trust should not be settled for real property but for nominal cash. Cash is then trust property. And it should be factual and not a fiction. A further recomendation is that a trust should always be initially settled withn initial cash on one day and further units be issued at least one day further if a conveyance occurs at or near that time. A days space will avoid concerns that duty applies to the real property transfer. Always a matter for which legal advice should have been given. Not accountants advice !!

    1. Initial units are issued to initial subscribers. This is by far the best. The initial units should NOT be for more than a token initial nominal number of units (eg 50 units x $1, $10 or $100) and should usually be MORE THAN ONE unitholder especially where a trustee is a human. Care must be taken that the initial units are not for the value of real property. That could result in transfer duty on the deed being applied on that as the dutiable value rather than advalorem duty of say $500 (NSW or $200 Vic. Later when the property conveyance is being planned and funding determined further units may be issued to those who personally borrow to acquire additional units. The register of unitholding and resolutions to issue units etc should be diligently maintained at all times and be consistent with trust accounting and banking records. In any land tax, duty or income tax review these docs will be requested.

    2. Deed has a settled sum AND initial units. I have a serious concern with this. The ATO addressed this in its views on hybrid trusts which equally applies to hybrid disc and hyrid unit trusts. Such a deed may even be held to be a hybrid UNIT TRUST. According to the ATO ruling the trustee must distribute proportionately to the settled sum and also the unitholdings (in a fixed manner). For a trust that later issues substantial further units this may round out as trivial. However for some trusts where for example the settled sum is $100 and then 2 unitholders each hold 50 $1 units then there could be THREE potential beneficial entitlements (or just two ? depending on the trust terms) so there is a potential for error of 50% in what was considered a fixed entitlement to income and / or capital. It could also jeopardise some deduction outcomes where interest for a borrowing is involved. Some well known trust deed suppiers even allow the trustee discretion to distribute trust income - So costly legal and tax advice maybe needed. Best avoided. These sorts of deed may also include rules allowing different units to have varied rights. If that seems evident do not settle the deed and seek legal advice first.

    Some of the worst deeds I have seen can be precedent docs from solicitors who dont practice in the area regularly.