Property problems: Unit trusts similar to company investment

Q. I have inherited from my father's estate units in two property trusts. One is listed on the NZX and the other on the ASX. I have never owned shares before. What is the difference between a "listed property trust" and a "listed company"? If I sell the Australian units will I have to pay any Australian taxes on the proceeds and is there any problem in bringing the money back to New Zealand?

A. The property trusts to which you refer are unit trusts - the units in which are listed on the relevant stock exchanges.

A unit trust is an investment vehicle in which the funds of investors are pooled.

The interest of investors in the pooled funds is divided into units with the interest of each individual investor being determined by the number of units they hold.

Unit trusts in most jurisdictions are governed by separate legislation which sets out the key elements for a unit trust, including the requirement for a trustee and a manager and certain matters relating to dealing with the funds of the trust.

In New Zealand, the legislation governing unit trusts is the Unit Trusts Act 1960. The public offer of units in a unit trust is governed by the Securities Act 1978.

A unit trust is governed by a trust deed, under which a trustee is appointed to hold the assets on trust for the unit holders.

Typically, listed unit trusts are "closed", which means that the interest of individual investors is not reduced by the issue of further units.

But in keeping with listed companies, listed unit trusts are typically able to accept further investment by making a "rights issue", whereby existing unit holders are given the opportunity to subscribe for additional units on the basis that, if they accept, their proportionate interest in the common fund will be kept.

In an Australasian context, most of the listed unit trusts have been established to invest in real estate, hence the label "property trust".

From an investment point of view, the funds of a property unit trust are typically fully invested in a portfolio of one or more commercial properties.

As a result, market commentators regard the key attributes of listed property unit trusts as their security of cashflow, underpinned by investments in property portfolios, which are typically leased for long periods to substantial tenants at pre-determined rentals at relatively low risk, because of the nature of the underlying property assets, and their regular distributions of income.

The units in a listed unit trust are tradeable on the relevant stock exchange on which they are listed.

For New Zealand income tax purposes, unit trusts are taxed as a company.

Imputation credits, which represent tax paid by the unit trust, attach to distributions by a New Zealand unit trust in the same manner as they would in the case of dividend payments by a company.

The distributions are taxable income of the unit holder and the imputation credits can be used to offset the New Zealand tax payable on that income.

Distributions by an Australian-listed unit trust will be taxable income of a New Zealand resident individual unit holder, but any franking credits (similar to New Zealand's imputation credits) for Australian tax paid by the unit trust attached to the distributions cannot be used to offset the NZ tax payable on that income.

A similar position applies for the franking credits in relation to dividends paid by Australian registered companies.

If you sell your Australian units you will not have to pay income tax in Australia as you would have held the units on capital account (assuming you are not a share trader) and Australian capital gains tax would not apply if you held less than 10 per cent of the issued units.

Further, there is no problem in bringing the money back to New Zealand.

In most other respects, an investment in a unit trust will be similar to that in a listed company.

Instead of being governed by a trust deed, the company is governed by its constitution and is a separate "legal person" owned by its shareholders, with the interest of any shareholder in the assets and income of the company governed by their proportionate interest of the number of shares on issue.

A unit trust is managed by a manager whose responsibilities are specified by the trust deed and, typically, a management contract entered into with the trustee.

The business of a company must be overseen by a board of directors who are required to exercise their powers in the company's best interests.

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