A unit trust is a trust whose ownership is carved up into units. Each unit represents a fixed share of the trust's income and capital, so a holder of 40 of 100 units is entitled to 40 per cent of what the trust earns and owns. That fixed-entitlement structure is what makes unit trusts useful for asset-holding ventures with several co-owners: each investor knows exactly what they own, new investors can come in by buying units, and the underlying assets sit with the trustee rather than with any individual.
Unit trusts are a standard structure for Australian property, intellectual property and project ventures. But how they actually work depends on a handful of moving parts: the trustee who runs the trust, the unit holders who own it, the deed that sets the rules, and the tax and state revenue systems that treat the trust largely as a conduit to the unit holders. This guide walks through each of those parts in order, then flags the places where the structure most often bites.
The players in a unit trust
At its core, a trust is simply an obligation for a person or entity to hold property for the benefit of others. The Australian Taxation Office describes a trust as an obligation for a person or other entity to hold property or assets for beneficiaries, and a unit trust is one species of that arrangement. Three roles sit at the centre of every unit trust:
- Trustee: The trustee is the legal owner of the trust's assets and manages them for the benefit of the unit holders, in accordance with the trust deed. The trustee can be an individual or a company, and it is the trustee who enters contracts, holds bank accounts and deals with the ATO on the trust's behalf.
- Unit holders: The unit holders are the beneficiaries. Their entitlement is fixed by the number of units they hold, which is the defining difference between a unit trust and a discretionary trust. A discretionary beneficiary has no entitlement to anything until the trustee exercises a discretion in their favour; a unit holder is entitled as of right to their proportionate share of income and capital.
- Settlor: The settlor is the person who establishes the trust by paying a nominal sum to the trustee on settlement. The settlor is usually not a unit holder and has no ongoing role once the trust is created.
Around these three sit the institutions the trust deals with: the ATO for tax registration and returns, ASIC where a company acts as trustee, the state and territory revenue offices for duty and land tax, and any secured creditors who register interests against the trust's assets.
Creating the trust: deed, settlement and units
A unit trust does not exist until three things happen: the trust deed is executed, the trust is settled, and units are issued.
The trust deed is the rulebook. It creates the trust, defines the units, and sets out how units are issued and transferred, how income and capital are distributed, what powers the trustee has, how decisions are made and when the trust ends. The deed is not a formality: the tax law routinely operates through it. For example, the ATO explains that, where the trust deed permits it, a trust's capital gains can be streamed to particular beneficiaries for tax purposes. A deed that does not allow streaming, or does not allow units to be issued in tranches, will constrain the structure for its whole life.
Settlement is the act that brings the trust into existence. A settlor hands a nominal sum to the trustee, usually at the same time as the deed is executed, and the trustee holds that sum on the terms of the deed. It is a small step that is easy to get wrong: if the deed's execution requirements are not followed, or the settlement is not properly recorded, the trust's validity can later be challenged, which is a serious problem once real assets have been transferred in.
Units are then issued to the investors and recorded in a unit register. Because unit trusts are not registered with ASIC, the register and the deed are the only evidence of who owns what, so they need to be maintained accurately from day one. If the venture involves staged investments, options or future issues, the deed needs to expressly allow them, and any side agreements between investors should be documented alongside.
How the trust runs
Once established, the trust operates as a cycle of earning, distributing and deciding.
Distributions
When the trust earns income, such as rent, licence fees or interest, the trustee distributes it to unit holders according to the deed and the number of units on issue. The trust can also return capital, for example when an asset is sold and the proceeds are paid out. Because unit holders have fixed entitlements, they generally cannot be cut out of a distribution that the deed says they are entitled to, which is what makes the structure attractive to investors who want certainty.
Decision-making
The deed sets out how decisions are made: which matters the trustee can decide alone, which require a resolution of unit holders, and what voting thresholds apply. In practice this is where the deed and a separate unitholders agreement divide the work. The deed governs how the trust operates; an agreement between the unit holders governs how the people involved work together, including transfers of units, preemptive rights, valuation and what happens on an exit.
Record-keeping
The trustee must keep the unit register, minutes, resolutions and distribution statements. These records matter for tax, for resolving disputes between unit holders, and for any future buyer of the business who wants to verify ownership.
The tax mechanics
The tax treatment is the reason most businesses choose a unit trust, and it is also where the structure is most often misunderstood. Trusts are not taxed as entities in their own right the way companies are. Instead, income flows through the trust to the people who are entitled to it.
Under s 97 of the Income Tax Assessment Act 1936 (Cth), where a beneficiary is presently entitled to a share of the trust's income, that share is included in the beneficiary's assessable income. The phrase "presently entitled" does a lot of work: it means the beneficiary has a present right to demand payment of the income, and it is the mechanism that makes the trust a conduit. Where no beneficiary is presently entitled to the income, the trustee is assessed instead, under ss 99 and 99A of the same Act. Section 99A taxes certain undistributed trust income at the top marginal rate, which is why trustees of unit trusts generally resolve to distribute each year rather than accumulate.
Capital gains work on a similar conduit principle. If the trust sells an asset at a gain, that gain can be streamed to particular unit holders who are "specifically entitled" to it, so the gain is assessed in their hands and they can access the 50 per cent CGT discount. Gains that are not streamed are allocated across the unit holders according to their proportionate entitlement to the trust's income. The character of the amount is preserved as it flows through the trust: money that was capital in the trustee's hands does not become ordinary income merely because it passes through the trust, a principle established in Charles v Federal Commissioner of Taxation (1954) 90 CLR 598.
The unit holders' own positions also attract CGT. Selling units is a CGT event, as the ATO's guidance on CGT for shares and units makes clear. And where the trust makes distributions of amounts that are not assessable income, those payments generally reduce the cost base of the units and can, once the cost base is exhausted, give rise to a capital gain. Unit holders who assume every payment from the trust is simply income can be caught out at tax time.
Administratively, the trust needs its own tax file number, and an ABN if it carries on an enterprise. The ATO's registration guidance confirms that a trust should have its own TFN, that the trustee registers in its capacity as trustee, and that the trustee must lodge a trust tax return regardless of the amount of net income unless the ATO advises otherwise. GST is a separate question: the trust must register if its GST turnover is $75,000 or more, and the ATO's GST registration guidance requires registration within 21 days of crossing the threshold. If the trust employs staff, the trustee also takes on employer obligations such as PAYG withholding and superannuation.
One structural point is worth understanding before choosing a unit trust over other structures: a unit trust does not give the trustee the distribution flexibility of a discretionary trust. In a discretionary trust, the trustee can choose each year which beneficiaries get what, which supports income splitting. In a unit trust, the deed and the unit holdings fix the entitlements in advance. You cannot stream a distribution to a low-income family member who holds no units. If tax flexibility across a family group is the priority, a discretionary trust is usually the better vehicle.
The corporate trustee question
Most unit trusts for small business use a company as trustee, and there are good reasons for that. A corporate trustee gives continuity: the company does not die or retire the way an individual trustee might, and ownership of the trustee company can be adjusted without changing the trustee entity itself.
But it is important to be clear about what a corporate trustee does and does not do. The trust is not a separate legal entity. The company is the entity that enters contracts, owes debts and holds the assets on trust. If the company, as trustee, signs a lease or a loan, it is the company that is liable on that contract, subject to its right to be indemnified out of the trust's assets. The corporate trustee structure separates the people from the contracting entity, but it does not mean no one is liable if the trust's assets are insufficient.
The directors of a corporate trustee also carry personal obligations. Under s 180 of the Corporations Act 2001 (Cth), directors must exercise their powers and discharge their duties with the care and diligence of a reasonable person in the corporation's circumstances, and the other director duties in Part 2D.1 apply in full. A director who causes the trustee company to act outside its powers, or to prefer one unit holder over another contrary to the deed, can be exposed personally, and the company's right of indemnity does not automatically protect them. Where the same people are both directors of the trustee and unit holders, the conflicts that can arise between the two roles need to be managed deliberately, usually through the deed and a unitholders agreement.
Where unit trusts bite
Several edge cases cause the most trouble in practice.
State duty and land tax
The state and territory revenue offices do not always respect the trust boundary. Where a unit trust holds land, transfers of units can attract duty in some states, and land tax regimes sometimes look through the trustee to the unit holders. In CPT Custodian Pty Ltd v Commissioner of State Revenue (2005) 224 CLR 98, the High Court considered when a unit holder controlling a unit trust could be treated as the owner of the trust's land for land tax. The outcomes depend on the state legislation and the level of control a unit holder has, which is why structure advice should always be checked against the state where the property sits.
Large trading unit trusts can be taxed as companies
Under Division 6C of the Income Tax Assessment Act 1936 (Cth), a unit trust that is both a trading trust and a public unit trust is taxed as a company rather than as a conduit. The ATO's guidance on unit trusts explains that a trading trust is broadly one that carries on activities other than holding passive investments, and a public unit trust is one with a broad spread of unit holders. For most small business unit trusts this does not apply, but a venture that grows and brings in outside investors can cross the line, and the tax consequences of that are significant.
The vesting date
Every trust has a vesting date, set in the deed, by which the trust must end and its assets be distributed. It is common for deeds to fix a long vesting period, but the date still arrives, and planning for what happens then, including the tax consequences of distributing the trust's assets, needs to start years in advance.
Unregistered security interests
If the trust finances assets, lends money or leases equipment, any security interest over the trust's personal property needs to be registered on the Personal Property Securities Register to be enforceable against third parties and to hold priority. Under s 20 of the Personal Property Securities Act 2009 (Cth), a security interest is enforceable against third parties only if it has attached and the secured party has possession, control or a written security agreement, and perfection by registration is what determines priority between competing creditors. An unregistered interest can be defeated by a later registered one, which is an expensive way to learn the system.
Changing the deed
Businesses evolve, and unit holders will want to amend the deed: to issue new classes of units, change distribution rules or extend the vesting date. The deed will usually state whether and how it can be varied, and a variation must be executed properly to bind everyone. Tax consequences of variations also need checking, because a variation that changes unit holders' entitlements can itself be a CGT event.
Where a lawyer comes in
A unit trust is a document-heavy structure, and the documents interact with tax law in ways that are easy to get subtly wrong. A lawyer's role is usually concentrated at three points.
First, at establishment: drafting a trust deed that fits the venture, including the unit structure, distribution mechanics, trustee powers, variation rights and vesting date, and making sure the deed, settlement and unit issues are executed properly. Second, at the points of change: issuing new units, bringing in investors, amending the deed, restructuring or exiting, where the interaction between the deed, the Corporations Act and the tax law is most acute. Third, in disputes: where unit holders fall out, the deed and the unitholders agreement determine who is entitled to what, and the fixed-entitlement nature of units means the arguments are usually about what the documents say.
The tax and accounting side should be run past an accountant in parallel: how income and capital are streamed each year, what is distributed versus retained, and what the unit holders' own tax positions will be. A lawyer and accountant working together at the structuring stage will cost a fraction of restructuring or unwinding a trust that was set up with the wrong deed.
The fixed entitlements decide everything
If there is one mechanic to take from all of this, it is the fixed entitlement. Every other feature of a unit trust, the distribution certainty, the CGT treatment, the look-through by state revenue offices, flows from the fact that units fix what each holder owns in advance. That certainty is the reason to choose a unit trust, and it is also the reason the drafting matters: once units are issued and assets are transferred in, the deed is the only thing standing between the unit holders and a dispute about who was promised what. Getting the deed, the tax settings and the corporate trustee right at the start is what turns a useful structure into one that survives the first falling out, the first new investor and the first audit. A conversation with a lawyer before the deed is signed is the cheapest insurance the structure will ever have.