Australian Domiciled Unit Trusts

Unlike their New Zealand counterparts, Australian based unit trusts do not pay tax at all (although there are some indications this could change).

Investors in Australian unit trusts will have various amounts DEDUCTED from distributions (withholding tax) depending on the nature of the trusts underlying assets AND the country of residence of the investor.

The fund will also ‘pass through’ to Australian residents any franking credits (same as imputation credits) that the fund has received from investments in Australian company shares. Unfortunately these franking credits are not available to New Zealand resident taxpayers for offset against income tax.

(Note: The same situation applies if a NZ investor invests directly in Australian shares. Franking credits attached to Australian company dividends are not available as tax credits in New Zealand).

Australian based unit trusts must also distribute any realised capital gains to investors under the Aussie capital gains rules. (Generally in the year the gains were realised).

What does this mean for a New Zealand investor in Australian based unit trusts?

1. For share trusts you effectively end up paying capital gains tax if you invest for the long term. This is because many Aussie unit trusts trade reasonably frequently and the capital gains are passed to the investor as income which is taxable in New Zealand.

However, when a trust has had negative returns for a longish period, there may be no distributions as the fund will have accumulated losses with no realised gains to distribute. In this case a NZ investor may achieve a considerable gain which would not be subject to tax. (Assuming no capital gains tax in New Zealand). However, be wary of trying this as a investment strategy as it would involve market timing beyond the capability of most.

Any non-resident withholding tax deducted in Australia CAN be used as a credit offset on tax payable in New Zealand. (New Zealand has what is known as a (avoidance of) Double Taxation Agreement with Australia)

2. For unit trusts which invest in Australian shares, franking credits are worthless for the New Zealand investor.

3. For income type trusts (mortgage, bonds etc) from a NZ tax perspective there is little tax difference between these and a NZ equivalent. Sooner or later, tax will be payable on the income. Australian withholding tax credits can be used in New Zealand to offset taxes payable here.

For those investors living outside of Australia and New Zealand, Australian unit trusts may have some significant tax advantages over the New Zealand equivalent. (Refer section for overseas investors.)