The moment you decide on a unit trust
The decision to use a unit trust usually arrives with a draft deed attached. Perhaps your accountant suggested a unit trust for a property development, or you and two business partners are pooling money into an investment and want a structure where everyone's share is defined in advance. Someone sends you a template, or a lawyer's draft, and asks you to review it before it is signed. Before you do, it helps to know what the whole document set should look like, because the deed is only one document among several.
A unit trust is a fixed trust: each unitholder holds units that give them a defined share of the trust's income and capital, in proportion to the number of units they own. The deed is the master document. It creates the trust, appoints the trustee, defines the units and the rights attached to them, and binds the trustee to administer the trust according to its terms. It does not, however, regulate the relationship between unitholders as investors, and it implies a small supporting set of documents: a register of unitholders, application forms, unit certificates and transfer forms. This article walks through what each document needs to contain and where the drafting traps sit.
What the unit trust deed needs to cover
The deed is where the trust is actually created. Everything else, from the register to the certificates, exists to record what the deed provides. The provisions below are the ones that matter most in practice.
Who's who: the trustee, the settlor and the unitholders
The deed names the three groups that make the trust work. The trustee holds the legal title to the trust's assets and is responsible for administering the trust. The trustee can be an individual or a company, and that choice ripples through the rest of the document set. The settlor is the person who settles the initial property on the trust, often a nominal amount, and generally has no further involvement after the trust is established. The unitholders are the people or entities whose units give them a beneficial interest in the trust's assets and income:
- Trustee: holds the assets and runs the trust; can be an individual or a company.
- Settlor: provides the initial settlement sum and then steps out.
- Unitholders: hold units that define their share of income and capital; can be individuals, companies or other trusts.
The trap here is choosing the trustee without thinking about the consequences. If the trustee is a company, that company must be registered with ASIC, will need its own directors, and its shareholders may want a shareholders agreement dealing with how the company is controlled. If the trustee is an individual, the documents are simpler, but the individual carries the trustee's duties personally.
The trustee's powers and the right of indemnity
The deed is the source of the trustee's powers. It should spell out what the trustee can do with the trust's assets: invest, borrow, buy and sell property, enter contracts, open bank accounts and engage advisers. Without clear powers, the trustee's ability to run the trust is uncertain, and third parties dealing with the trust will want to see that the trustee is authorised to act.
Alongside the powers sits the indemnity. Under general trust law, a trustee is entitled to be indemnified out of the trust's assets for liabilities properly incurred in administering the trust. Standard deeds restate and refine that right. The indemnity matters because running a trust involves personal liability: a trustee who contracts on behalf of the trust is personally liable to the other party, and the indemnity is the mechanism that lets the trustee recover from trust assets. A trustee with no effective indemnity is taking on real risk for little reward, which is why an individual trustee should never be chosen casually:
- Drafting minimum: the deed should state that the trustee's right of indemnity extends to liabilities incurred in the proper exercise of the trustee's powers.
- Trap: an indemnity only helps if the trust has assets to indemnify from; if the trust is underfunded, the trustee wears the loss.
- Corporate trustees: using a company as trustee is common because the company, rather than an individual, is the party that contracts and is liable. Directors should not assume the corporate structure insulates them from everything; obligations such as unpaid PAYG withholding and superannuation can attach to directors personally, so this is worth raising with your adviser.
The units and the rights they carry
The defining feature of a unit trust is that the units quantify each unitholder's entitlement. The deed needs to be precise about what a unit is, how many units are issued, and what rights attach to them. At a minimum, it should cover whether units carry rights to income, capital, or both, whether voting attaches to units or is held by the trustee, and whether further units can be issued later:
- Classes of units: some unit trusts issue different classes, so that, for example, one class receives income first or carries the voting rights.
- Issue price: the deed should set out the price at which units are issued and the process for issuing new units.
- Dilution: if the deed allows further units to be issued, existing unitholders' percentage holdings will be diluted unless the deed protects them; the drafting choice is whether new issues require unitholder approval.
There is also a threshold worth knowing before many units are issued. Under s 601ED of the Corporations Act 2001 (Cth), a managed investment scheme must be registered with ASIC if it has more than 20 members, subject to limited exceptions. Most unit trusts fit the statutory definition of a managed investment scheme. If your trust is expected to grow beyond 20 unitholders, or to be offered to outside investors, registration is a live question that should be settled before units are issued, not after.
The register of unitholders
A unit trust has no statutory register in the way a company does. Under s 169 of the Corporations Act 2001 (Cth), a company must keep a register of members recording each member's name and address, the date of entry, and, for a company with share capital, the allotments, the shares held and their classes. Nothing equivalent applies to an unregistered unit trust: the obligation to keep a register comes from the trust deed. If the deed is silent, there is no legal pressure to maintain one, yet distributions, votes and transfers all depend on knowing who holds what.
The deed should therefore oblige the trustee to maintain a register that records, for each unitholder:
- name and address;
- the number of units held and their class;
- the date the unitholder acquired the units and the date they ceased to hold them; and
- details of any unit certificate issued.
Maintaining this record matters for practical reasons. Distributions are calculated from unit holdings at particular dates, so an accurate register is what allows the trustee to pay each unitholder the right amount. It also resolves disputes over ownership, because the register is the starting point for working out who is entitled to vote and who is entitled to be paid.
Transferring units
Units are meant to be transferable. That is one of the attractions of a unit trust compared with other structures, because a unitholder who wants out can sell their units rather than being locked in. But a transfer only works if the deed provides the machinery for it. The deed should set out the form a transfer takes, whether the trustee's consent is required before a transfer is registered, how the price is determined, and what happens to the register when units change hands:
- Trap: a deed that gives the trustee an unqualified discretion to refuse transfers creates uncertainty and is a common source of dispute.
- Trap: a deed that is silent on transfers leaves no mechanism at all, so a unitholder who wants to exit has no clear path.
- Drafting choice: the right approach usually balances freedom to transfer with controls that protect the other unitholders, such as a requirement that the transferee accept the deed's terms.
Meetings and voting
Unit trusts are controlled through meetings of unitholders, so the deed needs to set out how those meetings work. It should identify who can call a meeting, usually the trustee or unitholders holding a specified percentage of units, how much notice is required, what constitutes a quorum, how resolutions are passed and whether minutes must be kept. Voting rights are commonly weighted by units held, so that a unitholder with more units has more say.
Where the deed stops is where the unitholders agreement begins. A meeting can deadlock, and if the deed has no mechanism for resolving a tie or a refusal to cooperate, the trust can stall. That is a situation the unitholders agreement, discussed below, is designed to address.
The vesting date
Every trust must come to an end, and the deed must say when. The vesting date is the date on which the trust terminates and the trust's assets are distributed to the unitholders according to their units. In NSW, for example, s 7 of the Perpetuities Act 1984 (NSW) fixes the perpetuity period at 80 years from the date the settlement takes effect, which is why standard unit trust deeds set a vesting date 80 years out.
The vesting date matters even though it is usually decades away. If the deed fails to specify one, or specifies one that is invalid, the trust's ability to continue is uncertain. It is a provision that looks like boilerplate but is part of the legal machinery that makes the trust valid in the first place.
The forms that move units: applications, certificates and transfers
Three short documents do the administrative work of the trust, and all three exist to keep the register accurate:
- Application for units: the document an incoming unitholder uses to formally request units. It records the number of units applied for, the price and the applicant's acceptance of the deed's terms.
- Unit certificate: issued by the trustee when units are granted. It states the number and class of units held and should carry a unique number so it can be tracked against the register.
- Transfer form: formalises the transfer of units from one unitholder to another. It records the number of units transferred, the price per unit and the transferee's acceptance of the deed's terms.
These documents are simple, but they are the paperwork that makes the trust run. A trust whose certificates and transfer forms are inconsistent with the register will eventually produce a dispute about who actually owns the units and who should have been paid.
The unitholders agreement: optional clauses that earn their place
The deed governs the trust. It does not govern the relationship between unitholders as investors. When unitholders are unrelated parties pooling money into a venture, questions will eventually arise that the deed does not answer: what happens if one unitholder wants out, or sets up a competing business, or has a conflict of interest with the trust's dealings. A unitholders agreement is optional, but it is where those questions get answered. The clauses below are the ones that earn their place most often:
- Dispute resolution and deadlock: worth including whenever two or more unrelated unitholders are involved. An agreed path through negotiation and mediation, before any court action, keeps a disagreement from freezing the trust while it is resolved.
- Transfer and exit rules: worth including when unitholders care about who else joins the trust. Rights of first refusal let existing unitholders buy the units of someone who wants out, and tag-along rights let a minority unitholder sell their units alongside the majority rather than being left behind.
- Non-compete: worth including when the trust carries on a business and a unitholder could start a competing operation that reduces the trust's value.
- Confidentiality: worth including when the trust holds commercially sensitive information, such as details of a development site or customer lists.
- Conflict of interest: worth including when unitholders also deal with the trust in their own right, such as a property developer unitholder who trades with the trust, and should be required to declare those dealings.
Two further points are worth knowing. If the trustee is a company, the shareholders of that company may need a shareholders agreement alongside the unitholders agreement, covering how directors are appointed and how shares in the trustee company move when units change hands. And for asset protection and tax planning reasons, units in a unit trust are often held by discretionary trusts rather than by individuals directly, so the clauses should be drafted to bind the people who actually receive the benefit of the units, not just the nominal holder.
Where an Artificer Legal practitioner comes in
A unit trust document set is only as good as its drafting, and the drafting choices above interact with each other. An Artificer Legal practitioner can help at the points where the choices are made:
- drafting the unit trust deed from scratch, or reviewing a template or existing deed for gaps in the powers, indemnity, transfer and vesting provisions;
- advising on the choice between an individual and a corporate trustee, and what that choice means for the rest of the document set;
- structuring unit classes, voting rights and issue mechanisms so that later events, such as new investment, do not create disputes;
- checking whether the trust must be registered as a managed investment scheme with ASIC under s 601ED of the Corporations Act 2001 (Cth), particularly if it will have more than 20 members or be offered to outside investors;
- flagging the tax consequences of the structure, including that a widely held unit trust carrying on a trading business can be taxed as a corporate tax entity under Division 6C of the Income Tax Assessment Act 1936 (Cth), as the ATO's guidance on unit trusts explains;
- confirming post-signing steps, such as the trustee registering the trust for its own tax file number and, where the trust carries on an enterprise, an ABN in the trustee's capacity as trustee, as set out in the ATO's registration and reporting obligations for trusts; and
- drafting the unitholders agreement so it sits consistently with the deed rather than cutting across it.
Stamping is one more reason to take advice. Depending on the state and on whether property is transferred into the trust, stamp duty may be payable on the deed, and the position varies between jurisdictions. A quick check before the deed is signed is much cheaper than a duty assessment discovered later.
Why the transfer provisions decide whether your unit trust survives its first disagreement
Most unit trust problems surface when an investor wants out or a new investor wants in. That is the moment the deed's transfer machinery is tested, and it is the provision most often left vague. A deed that gives the trustee an unqualified discretion over transfers, or that says nothing about how units move, produces exactly the dispute it was meant to prevent. The deed that works is the one where the transfer and exit provisions were drafted with the actual unitholders in mind, and where they are backed by an agreement that deals with deadlock and exit before the deadlock happens.
The rest of the document set supports that core. The deed creates the trust and defines the units, the register records who holds them, and the application, certificate and transfer forms keep that record accurate. The unitholders agreement is optional but is best practice wherever unrelated parties are pooling money. Get the deed's transfer and exit machinery right, keep the register accurate, and most of the disputes that otherwise end in a lawyer's letter never get started.