Unit Trusts

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• Introduction to unit trusts
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Taxation of unit trusts

Distributions received from unit trusts are subject to tax in the same way that company dividends are. Like shares, the trust, where applicable, will attach imputation credits.

Certain tax implications may arise on the redemption of your unit trusts.
The following general comments apply.

• Redemptions by the reverse order or ordering rules will not incur an additional tax liability unless you are classed as a trader.
• Redemptions by the manager buy-back method will not incur an additional tax liability unless you are classed as a trader.
• Redemptions by the direct redemption method will be subject to tax. However, there will be imputation credits attached. This method is likely to favour investors who are either on a marginal tax rate of less than the 33%, or are traders.

Imputation credits

Unit trusts are subject to the same tax regime as companies.

Just as shareholders are required to pay tax on their dividends, unit holders are required to pay tax on the distribution income they receive through owning unit trusts. However, because the fund has already paid tax, distribution imputation (or tax) credits are issued. This is to ensure that you only pay tax once, preventing the Government from "double dipping".

Distributions are either fully, partially or not imputed. The fund will advise you of the available imputation credits in your end of year tax statement.

The way it works is that you pay the tax on your distribution income, then claim a credit back based on the imputation credit attached to your distribution payment. The effect of the imputation credit will depend on your marginal tax rate.

Taxpayers on a marginal tax rate of less than 33% will receive a tax credit.
The effect on taxpayers on a marginal tax of 33% will be neutral.
Taxpayers on a marginal tax rate greater than 33% will be required to pay additional tax.

Seek good advice

As with all taxation issues, the information is complicated but very important. the Shape of Money recommends that you discuss your personal tax situation with your financial adviser.