An equity investment offered on CrowdfundUP may take several forms (we're not covering debt investments in this blog). Let's look at these different types of investments in more detail.
Investments listed on CrowdfundUP will be in the form of either shares in a Company or units in a Unit Trust (also known as an "interest").
Both of these types of investments represent a unit of ownership in the entity established by the Project Sponsor.
For example, if you hold 2 shares in a Company which has 100 shares, you own 2% of the Company.
If you hold 2 units in a Unit Trust which has 100 units, you are entitled to 2% of the Trust distributions.
For each individual project, the Sponsor will establish either a special purpose Company or Unit Trust. Special purpose means that the Company or Trust has only one purpose, which is to manage the Project being listed, including ownership of Real Estate. The entity is not intended or empowered to enter into any other activities.
The choice of a Company versus a Trust is dependant on the type of project, the tax implications, the ability to obtain finance and cost of setup and administration.
The fundamental difference between a Company and a Trust is that a Company is established to aggregate a group of shareholders for the common purpose of producing a profit. The activities of a Company are determined by the Board of Directors, who must act in the best interest of all shareholders.
A Trust on the other hand is aimed at preserving and maintaining the assets that it holds on behalf of its beneficiaries. Trusts are administered by a Trustee, who is responsible for managing the Trust assets in the best interests of its beneficiaries, in accordance with a Trust Deed. The Trust Deed defines exactly what the Trust can, and cannot, do.
In practical terms, an investment in a Trust or Company is similar - in both cases any capital gains and income are directed to share or unit holders. The legal form to distribute capital gains and income can be quite different however.
A Company will generally return income as a dividend, and capital gains as a capital distribution.
A Unit Trust will return income and capital gains as Trust distributions.
A Company has a separate identity for tax purposes, so must pay tax on its net income at the company tax rate of 30%.
Income from the Company is distributed in the form of a dividend. Because dividends are paid after tax, dividends received by a shareholder are usually entitled to a franking credit, which compensates the shareholder for tax already paid by the Company.
A Trust on the other hand does not generally pay tax in its own right - the net profit of a Trust is paid by Unit holders as a Trust distribution. The Trust distribution is then taxed in the hands of the Unitholder.
Companies may return capital gains as a capital distribution. Capital gains are taxed within the company at the company tax rate of 30%.
For Unit Trusts, capital gains are again usually taxed in the hands of the Unitholders.
We strongly recommend you seek independent taxation advice which takes into account your individual circumstances.
The use of a Company or a Unit Trust is determined by the Project sponsor, and the choice depends on the specific project.
From a practical point of view, the use of a Company or a Unit Trust should not directly affect project profitability or your investment decision, its simply a means to an end.