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Many unit trust deeds need varying

By Shaun Backhaus & Daniel Butler, DBA Lawyers
September 15 2022
6 minute read
Many unit trust deeds need varying
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With many unit trust deeds failing to reflect the recent tax and legal developments, some deeds may need to be varied, particularly where SMSFs are involved.


Unit trusts are a common investment structure and can provide a simple way for parties to co-invest in property or business together. In particular, investing via a unit trust is a popular way for SMSFs to invest in real estate including to develop property.


While the terms of a unit trust deed typically cover a number of important provisions, there are a number of critical provisions that may have been overlooked. Where a unit trust is lacking some of the key provisions, the deed should be varied to minimise the risk moving forward. This risk is especially heightened when the unit trust deed was not obtained directly from quality a law firm. 

A variation to a trust deed to provide greater certainty, minimise risks, and to assist avoiding costly disputes should be prepared by a lawyer with plenty of trusts and tax expertise including experience in the relevant state or territory duty legislation. Unless carefully managed a variation can give rise to significant tax and duty implications.

Why many unit trust deeds should be varied

There are many unit trust deeds that were prepared many years ago and do not reflect the range of trust, tax, and other legal developments since they were originally prepared. Moreover, many deeds supplied in recent times are not of an acceptable quality, especially if they were not supplied by a law firm practising in the area.

Note that the High Court in CPT Custodian Pty Ltd v Commissioner of State Revenue (2005) 224 CLR 98 stated that 

... [the term] "unit trust", like "discretionary trust", in the absence of an applicable statutory definition, does not have a constant, fixed normative meaning ...

Thus, each unit trust depends on how the trust deed is drafted and what provisions are included or omitted. Before investing in a unit trust, the parties should ensure the terms of a trust are suitable for the proposed venture and timely action should be taken to vary the terms (or obtain a new trust) if required. Given the cost of a variation, it may be more cost effective to establish a new trust where circumstances allow. 

Naturally, we would strongly recommend that any new trust deed be obtained from a reputable law firm and that any variation be prepared by a law firm with experience in trust, tax and duty law. 

Does the unit trust qualify as a fixed trust?

Basically, unless a unit trust qualifies as a fixed trust, the trust will be treated as non-fixed. A non-fixed trust includes a discretionary trust under Schedule 2F of the Income Tax Assessment Act 1936 (Cth) (ITAA 1936).

The ordinary and statutory income of a non-fixed trust distributed to an SMSF can be taxed at 45% instead of the concessional tax rate of 15% and 0% if the SMSF is in pension mode. However, the ATO’s current administrative practice generally accepts that many unit trusts should not be subject to non-arm’s length income at 45% provided distributions of distributable income are made in proportion to each unitholders equity ownership and there is no exercise of discretion regarding distributions. This current ATO administrative practice could change without notice, and accordingly, should not be relied upon.

The Federal Court in Colonial First State Investments Limited v Commissioner of Taxation [2011] FCA 16 confirmed that a unit trust that operated as a managed investment trust that allowed a 75% vote to amend the trust’s governing rules did not qualify as a fixed trust as there was the possibility, although it was unlikely to be exercised, for the majority to dilute the 25% minority’s interests in the trust. 

Checking the voting threshold to vary a unit trust deed is a quick test of determining whether a unit trust satisfies a fixed trust definition, ie, unless 100% of unitholders must consent to a variation, the unit trust may not qualify as a fixed trust for the purposes of Schedule 2F of the ITAA 1936. Schedule 2F of the ITAA 1936 deals with trust losses and franking credits (discussed in more detail below).

It is important to note that as there is no fixed or normative definition of unit trust, there is also no normative definition of fixed trust. In particular, the type of fixed trust that is needed depends on the purpose and intended use of the trust, eg, NSW land tax has its unique definition of ‘fixed trust’. The NSW definition of fixed trust differs to the definition of fixed trust for Schedule 2F of the ITAA 1936 purposes and these two definitions differ to the meaning of fixed trust for trust law purposes. Thus, when referring to a fixed trust, you need to be more specific in relation to what type of fixed trust you need.

Despite the complexity of the law in this area, we come across suppliers that market their unit trusts as fixed trusts but include discretionary classes of units with flexible distribution entitlements which would make them non-fixed.

What other tax implications arise if a unit trust is not fixed?

There are a range of other Federal tax reasons why a fixed trust is preferred to a non-fixed trust. For instance, unless a family trust election or an interposed entity election has been made in relation to a trust in accordance with Schedule 2F of the ITAA 1936, there are stricter rules applying to non-fixed trusts (as compared to fixed trusts) for such matters as:

  • whether a tax loss can be carried forward to a subsequent financial year; or
  • The ability to distribute franking credits from the trust to a unitholder.

Broadly, an SMSF is treated as a non-fixed trust for the purpose of determining whether a unit trust can carry forward a tax loss. In certain circumstances, an SMSF trustee may be required to make a family trust election or an interposed entity election so the unit trust can carry forward a loss.

Does the type of unit trust deed impact the land tax liability?

Higher land tax is payable in a number of Australian states and territories if the trust does not qualify as a fixed trust under the legislation in the relevant jurisdiction. 

For example, New South Wales has a very strict definition of fixed trust in order to obtain the land tax threshold, the threshold is $822,000 for the 2022 calendar year. A discretionary or non-fixed trust (referred to as a ‘special trust’ in NSW) is not entitled to any land tax threshold and therefore pays an extra $13,152 per annum in land tax for 2022 compared to a fixed trust (based on a 1.6% land tax rate on the unimproved value of land). NSW also has a premium land tax threshold where the land tax rate increases to 2% where the unimproved value of land exceeds $5,026,000.

Naturally, you should check the land tax legislation in each jurisdiction to determine what extra land tax is payable if the trust does not satisfy the relevant test. Expert advice should be obtained if in any doubt.

Can unitholders be liable for trust liabilities?

Unitholders are, prima facie, personally liable to indemnify a trustee for liabilities that the trustee incurs in carrying out its duties. As a principle of law, the trustee’s right of indemnity against liabilities properly incurred in the execution of its duties is not limited to the trust property but extends, where the trust assets are insufficient to satisfy the indemnity, to a right of indemnity against the beneficiaries. The full federal court in Fitzwood v Unique Goal Pty Ltd (In Liq) [2002] FCAFC 285 referenced this principle and cited McGarvie J in JW Broomhead (Vic) Pty Ltd (in liq) v JW Broomhead Pty Ltd (1985) 9 ACLR 593 at 635:

The basis of the principle is that the beneficiary who gets the benefit of the trust should bear its burdens unless he can show some good reason why his trustee should bear the burdens himself.

Given this principle, to afford unitholders with protection against personal liability, appropriate wording must be included in the deed to limit the liability of unitholders to the assets of the trust. Otherwise, unitholders’ personal assets may be exposed to risk.

Thus it is prudent to carefully examine each unit trust deed to make sure it is appropriate and does not expose unitholders to unwanted liabilities. 

Are there tax risks in varying a unit trust deed?

Yes, care and caution needs to be exercised before varying a trust deed as a resettlement can give rise to significant tax and duty liabilities. 

The case of FCT v Clark [2011] FCAFC 5 did provide support for the ability to vary a unit trust deed without giving rise to a capital gains tax (CGT) event where the deed contained an appropriate variation power. The ATO issued a tax determination, TD 2012/21, shortly after the Clark decision confirming this CGT position.

However, the position under each state and territories duty legislation is not so clear and in certain jurisdictions a resettlement risk needs to be carefully managed. Expert advice from a lawyer with tax and duty experience in the relevant jurisdiction is recommended to make sure variations do not attract unwanted tax liabilities.


As can be seen from the above, an important first step in considering whether a unit trust is an appropriate structure is to carefully examine the trust deed to ensure it is not lacking one or more key factors outlined above. Obtaining trust deeds from quality suppliers will reduce these risks. 

By Shaun Backhaus, lawyer and Daniel Butler, director, DBA Lawyers

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