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Unit Trusts

This article on Unit Trusts is specifically addressing trust structures used in the public realm, by investors seeking to pool comparatively small amounts of invested capital – though not necessarily small in absolute terms – to achieve returns not likely to be achieved in a direct investment of that amount of capital.

What are unit trusts?

Unit trusts are investment vehicles for pooling the money of investors. They are a form of managed investment that can include superannuation and rollover funds, insurance bonds and friendly society bonds. The essential differences between the different forms of managed investments are their legal and taxation structures.

However, the common feature of managed investments is that they allow people to combine their savings for investment purposes. These funds can then be used to access a wide range of investments and markets, some of which are not generally available to individuals with small amounts to invest. A unit trust’s investments are managed by investment professionals known as ‘fund managers’.

The term ‘unit trust’ describes the legal structure of a particular form of managed investment. Like all formal trusts, they are usually set up through a document known as a trust deed, which sets out the rights and responsibilities of the various parties involved.

The trust is divided into ‘units’, which are allocated to each investor according to the amount of money they have invested in the trust. The number of units you hold as an investor determines your share of the overall assets and income of the trust.

What types of investments can be made?

There are hundreds of unit trusts available in Australia today. Some only invest in specific types of assets such as:

  • Australian shares,
  • Government bonds,
  • Property securities,
  • Direct property,
  • International shares,
  • Cash, and
  • Mortgages.

Others invest in a spread of assets and are called diversified funds. You would recognise these by some of the common names used to describe them, such as:

  • Capital stable,
  • Managed growth,
  • Income and growth,
  • Balanced,
  • Long-term growth, and
  • Income plus.

Are unit trusts taxed?

If a unit trust distributes all its investment income to unitholders, the trust itself will pay no tax on investment income.

The investment income is then taxable to you as a unitholder, as though you had earned it yourself. Investment income from a unit trust can include interest, rents, dividends, capital gains and foreign income. Any tax concessions associated with this income, such as imputation credits, foreign tax credits, and tax-free or tax deferred income, flow through to you in association with the distribution.

In addition, when you redeem or switch units in a unit trust, you will have made a disposal for capital gains tax purposes of units initially purchased in the trust. Therefore, you may incur an additional capital gain or capital loss in these situations.

What are the advantages of investing through this vehicle?

The main advantages of investing in a unit trust stem from the pooling of individual investor’s small amounts of money into a larger amount for investment purposes. Therefore, the key benefits of investing in a unit trust are:

  • Access to investments not normally available to small investors,
  • Spread of your investment risk over different assets and markets,
  • Provision of professional investment management of your portfolio, and
  • Investor confidence backed by supervision by a government regulator – the Australian Securities and Investments Commission (ASIC).

How do I choose a unit trust?

This can be very difficult given the number from which you can choose; and the differences between them. Some investors (usually unadvised, or ill-advised) choose investments on the basis of past performance. This can be a very dangerous practice because there are no guarantees that past performance, either good or bad, will be repeated in the future.

The Continuum Financial Planners Pty Ltd team of experienced advisers use industry-awarded, well-researched managed investment (unit) trusts that we are prepared to recommend to our clients. To engage with one of our advisers who will listen to your needs, goals and objectives; develop a clear understanding of your financial circumstances and aspirations; and suggest solutions to help you achieve the outcome that is a personalised, professional wealth management solution for you, please call 3421 3456, or use our website Contact Us facility to make an appointment.

(This article, originally posted in August 2009, has been updated occasionally, most recently, in January 2020.)

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