Are the number of units in a unit trust fixed?

Title pretty much says it all. I'm trying to wrap my head around the practical side of financing a unit trust. Still lots of things I don't quite understand.

My understanding is that a unit trust gets its initial funding to purchase property by selling units. So a person would get a loan for $100k and purchase units in the trust. The trust will use this as a deposit and get a loan for the balance remaining to purchase the property.

Is this how it works?

What then happens when the trust wants to purchase another property? Does it issue out more units? Or are the units fixed meaning the current unit holders will have to chip in more funds proportional to their percentage ownership of units.
 
Say i have $100k from equity release from other property
I setup a trust, then the trust sets up a bank account
I transfer my $100k to the trust's bank account, in exchange the trust gives me 100k $1 units
I then go get a loan (personally) to buy a house worth $500k.
A 3 way trade then happens - a) bank lends me $400k b) I obtain another 400k $1 units c) trust owns a house and can begin renting it out

Generally ya minimize the number of assets held in each trust for land tax reasons (not NSW) and asset protection reasons.
 
There are at least 3 definitions of a fixed trust
- land tax acts (various)
- Income Tax acts ITAA
- SIS Act

Generally the NSW land tax definition is the main one that people consider. s3A of the Land Tax Management Act. Unit hold must have an absolute right to income and capital of the trust and there no ability to vary this right under the deed.

So a trustee could not redeem units or issue more units to others if it changes the beneficial ownership of the existing unit holder.
 
What then happens when the trust wants to purchase another property? Does it issue out more units? Or are the units fixed meaning the current unit holders will have to chip in more funds proportional to their percentage ownership of units.

One fixed trust should not own more than 1 property for a few reasons:
1. Harder to pay off all loans to get the units into a SMSF (must be no loans at all in the trust for this to happen).
2. CGT strategies
3. Land tax in some states
4. stamp duty benefits in some states.
 
Thanks Terry for the reply. That makes it very simple then. Only 1 property per unit trust.

But does this restrict the type of property one should invest in a unit trust to only unit blocks or larger commercial properties. Is it viable to have only 1 residential house per unit trust considering the costs and admin involved?
 
BTW, i've just finished reading your ebook. Fantastic stuff. The last section was a nice touch. How you went through practical examples of the different investing structures and listed their pros and cons. Great stuff.
 
Thanks Terry for the reply. That makes it very simple then. Only 1 property per unit trust.

But does this restrict the type of property one should invest in a unit trust to only unit blocks or larger commercial properties. Is it viable to have only 1 residential house per unit trust considering the costs and admin involved?

Yes, i think so. I put my development i'm doing in one, but I prob wouldnt bother putting a normal buy and hold property in one.
 
Thanks Terry for the reply. That makes it very simple then. Only 1 property per unit trust.

But does this restrict the type of property one should invest in a unit trust to only unit blocks or larger commercial properties. Is it viable to have only 1 residential house per unit trust considering the costs and admin involved?

it all depends...
 
It does depend

1. do you want to move the property into superannuation at a later stage ?
2. do you want to be able to move the property to a family member with potentially less stamp duty ?
3. do you want to take advantage of the refinancing principle ?

some of the questions that need to be asked before determing whether a UT is beneficial.

Importantly who holds the units is just as important. A UT doing a development where the units are held by an individual could well be a disaster. Particularly where the director of the corporate trustee is the same as the unitholder.

Where loans are involved and the unitholder is claiming deductions have also seen many cases where there are no application for units, no certificates issued, unit register not updated. A right royal mess.
 
One fixed trust should not own more than 1 property for a few reasons:
1. Harder to pay off all loans to get the units into a SMSF (must be no loans at all in the trust for this to happen).
2. CGT strategies
3. Land tax in some states
4. stamp duty benefits in some states.

The CGT problem always concerns me more .
- trust acquires two IPs. Each cost $100
- several years later one is worth $300 the other worth $100
- Which do you sell ?? Nobody want to trigger CGT right ??
- CGT ?? The sale of a IP for $100 that cost $100 means the unitholder makes a cap gain of $200... Original trust value was $200 and is now $400.

Also blending IPs means a transfer of the trust cant be used to reduce duty in some instances
 
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