Two owners who are not related to each other are about to put money into a business together. Or a family business has grown past the point where profits can sensibly sit in one person's name. Either way, someone suggests "setting up a trust", and that is where the real decision begins: a discretionary trust and a unit trust both carry the word "trust", but they answer the question "who gets what?" in opposite ways.
A trust is an obligation imposed on a person or other entity to hold property for the benefit of beneficiaries. In legal terms it is a relationship, not a separate legal entity, although it is treated as a taxpayer for tax administration purposes (ATO guidance on trusts). The trustee, an individual or a company (a corporate trustee), holds the assets and administers the trust in line with the trust deed.
The two structures share that skeleton. They differ in how a beneficiary's entitlement is created:
- Discretionary trust (often called a family trust): The trustee decides each year which beneficiaries receive income and capital, and in what proportions, within the limits set by the trust deed. No beneficiary has a fixed entitlement until the trustee resolves to give them one.
- Unit trust: Beneficiaries hold units, and each unitholder's entitlement to income and capital follows the units they hold. Units can be bought and sold much like shares in a company (ATO on unit trusts).
One common confusion is worth clearing up before you weigh anything else. "Family trust" is not a separate type of trust. It describes a discretionary trust whose trustee has made a family trust election with the ATO, which unlocks certain tax concessions discussed below. And a trust is never "owned" the way a company is: there are no shareholders, and whoever controls the trustee controls the trust, so the trustee choice deserves as much thought as the trust type.
The factors that should drive your choice
Work through these five questions in order. Each one narrows the choice.
Who the owners are and how aligned their interests are
Start with the people. If the owners are family members comfortable with the trustee making decisions year to year, a discretionary trust's flexibility is an advantage: the trustee can direct more income to the member who needs it in a given year and less to one who does not.
If the owners are unrelated, or are contributing very different amounts of capital, a unit trust reflects the arrangement the way the parties actually understand it. Each person's stake is their units, and the return follows mechanically. Where each structure fits best:
- Discretionary trust: Best where ownership stays within a family or close group and profit needs change year to year.
- Unit trust: Best where each owner's contribution differs and they want their share of profits to match their contribution, predictably and without negotiation.
How the profits need to flow each year
Tax follows the distribution. Under s 97 of the Income Tax Assessment Act 1936 (Cth), a beneficiary who is presently entitled to a share of the trust's income is assessed on that share in their own hands, regardless of when or whether the income is actually paid to them (ATO on trust income). The trustee usually makes beneficiaries presently entitled by passing a resolution before the end of the income year on 30 June.
In a discretionary trust, that resolution is the whole point: each year the trustee chooses who gets what, within the deed. The corollary is that income left undistributed can be taxed in the trustee's hands at the top marginal rate under s 99A. The annual resolution is a live decision with a real cost attached, not paperwork.
In a unit trust the flow is mechanical. Income is distributed according to unit holdings, which investors can predict. Departures from the unit-based split generally require the deed to permit them and the unitholders to agree. Either way, the timing discipline is the same: the ATO maintains a resolutions checklist precisely because this step is where trusts go wrong, and a beneficiary who is not made presently entitled by the right date is not taxed on the income, which is hard to unwind once the year has closed (ATO on trust resolutions).
Whether investors or partners are coming and going
This is usually the question that separates the two structures, because the two answer it in opposite ways:
- Unit trust: Units can be issued to a new investor, transferred, or bought out at an agreed price. Because a unit is a defined interest, it can be valued, and an investor gets a clean, enforceable return proportional to what they put in.
- Discretionary trust: Beneficiaries can be added or removed under the deed, but no beneficiary holds a defined interest to sell or value. A new investor cannot easily be given a fixed share of future profits, because the trustee's discretion determines each year's distribution.
If outside capital is on the horizon, even a few years away, the ability to issue and price units usually makes a unit trust the more workable vehicle. If the ownership group is closed and intends to stay that way, the discretionary trust's flexibility costs nothing.
Asset protection and who controls the business
Trustees are personally liable for the debts of the trust, although they are entitled to be indemnified out of the trust's assets for liabilities properly incurred (ATO on trustees). That is why many businesses use a corporate trustee: a company with limited liability sits between the owners and the trust's trading liabilities. If you go down that path, the trustee company brings its own compliance, including directors' duties under the Corporations Act 2001 (Cth), ASIC lodgements and a constitution.
On asset protection, a discretionary trust is often preferred because no beneficiary has a fixed claim on the assets until the trustee resolves otherwise. But asset protection has hard legal limits. Under s 121 of the Bankruptcy Act 1966 (Cth), a transfer of property by someone who later becomes bankrupt is void against the trustee in bankruptcy if the transferor's main purpose was to keep the property from creditors. That purpose is inferred if the person was, or was about to become, insolvent at the time of the transfer. In plain terms, a structure set up to shelter assets from debts that already exist, or are about to, can be unwound. The protection is real only when the structure is in place before the problems start.
Control also differs. A discretionary trust concentrates decision-making in the trustee, which suits a family that wants one decision-maker. A unit trust is governed by the deed and the unit register, which suits an arm's length relationship where the parties want decisions tied to how much each holds.
Tax planning flexibility
Both structures are flow-through vehicles for tax purposes, but they offer very different room to manoeuvre:
- Family trust election: A discretionary trust controlled by a family group can elect to become a family trust, which gives access to concessional treatment, including under the trust loss provisions (ATO on family trusts). The trade-off is family trust distribution tax: distributions of income or capital to anyone outside the family group are taxed in the trustee's hands at the top marginal rate plus the Medicare levy.
- Streaming: A trust can stream capital gains and franked distributions to particular beneficiaries, so the people best placed to use the tax attributes receive them (ATO on streaming).
- CGT discount: Capital gains on assets held for at least 12 months are reduced by a 50% discount in the hands of individuals and trusts (Division 115 of the Income Tax Assessment Act 1997 (Cth)), and the discounted gains can be distributed to individual beneficiaries who apply the discount to their own gain.
A unit trust's distribution pattern is fixed by the units, which makes this kind of year-to-year tax tailoring harder. The family trust election, streaming and the CGT discount all depend on the family group, the assets and the deed, so get tax advice on your facts before treating any of this as a given. And whoever ends up as trustee carries the administrative load: the trustee is responsible for registering the trust in the tax system, lodging the trust's tax return and paying some tax liabilities on the trust's behalf (ATO on trustees).
How Artificer Legal can help you choose and implement the structure
The choice between a discretionary trust and a unit trust is usually made once and lived with for decades, so the work is in getting the decision right and then documenting it properly. An Artificer Legal lawyer would:
- stress-test the assumptions behind the choice, including who the beneficiaries or unitholders should be, whether the family group definition fits the family trust election, and whether the trustee should be an individual or a company;
- model the downside, including what happens under s 99A if income is left undistributed, what the family trust distribution tax exposure looks like if the family group changes, and what tax and duty consequences would follow if you needed to restructure into a different vehicle later;
- draft the documents the chosen path needs, being the trust deed itself with powers and distribution mechanics that match the decision rather than a generic template, trustee resolutions, and, for a corporate trustee, the company's constitution and internal decisions;
- build the operating calendar, covering when the family trust election must be made, the annual resolution deadline before 30 June, and the records the trust must keep.
The cost of getting this wrong shows up later, in a restructure that triggers capital gains tax and state duties, or in a distribution that cannot be made the way the business needs it to be. The structure is decided on paper, before the money moves, and that is where legal input earns its keep.
The deed decides what the label promises
The question that takes the most effort to get right is not "discretionary or unit". It is who should have a say in the profits, and whether that should be able to change from year to year. The trust deed is where that answer is written, and it is much cheaper to draft the deed around the right answer than to change structures later, when moving assets can trigger tax and duty consequences. A discretionary trust's flexibility is real, but only if the trustee exercises it properly every year. A unit trust's certainty is real, but only if the deed and unit register support it.
Putting it together: a trust is a relationship, not an entity, run by a trustee under a deed. A discretionary trust gives the trustee the flexibility to direct income and capital among beneficiaries each year, which suits family businesses, while a unit trust fixes entitlements to units held, which suits unrelated partners and investors. Work through who the owners are, how profits need to flow, whether investors are coming or going, how much control and asset protection you need, and the tax flexibility on offer. Take advice, draft the deed deliberately, and treat the annual resolutions and compliance as part of running the business rather than an afterthought.