- Know the two roles before you check anything
- Can you raise money or borrow through the trust?
- Are your unitholders still on the same page?
- Is the trustee doing its job?
- Is the tax outcome what you set the trust up for?
- Are the franking credits flowing, and is your trust fixed for tax?
- Getting a second opinion on your unit trust with Artificer Legal
- Why most unit trust deeds fail the fixed trust test
You set up a unit trust a few years ago to run a business or hold an investment property, and it served you well at the time. Structures do not stay right forever. The business may now need a bank loan, one of the unitholders may want out, a self-managed superannuation fund (SMSF) may be knocking on the door as an investor, or the tax outcome on a recent sale may have come as a surprise. A unit trust is a workable vehicle, but it only keeps working while the money, the people and the tax position all line up. The questions below are the practical check that most business owners actually need to run.
Know the two roles before you check anything
Every unit trust has two moving parts. The trustee legally owns the trust's assets and holds them for the benefit of the unitholders. It acts under the trust deed and under the general law duties that apply to all trustees. The unitholders are the investors, and they receive distributions in proportion to how many units they hold. Almost everything in this check comes down to three things: whether money can move into and out of the trust, whether the people involved are still aligned, and whether the tax outcome is what the structure was set up to deliver.
Can you raise money or borrow through the trust?
If the plan is to bring in outside investors, expect resistance. Venture capital firms and sophisticated investors generally prefer a company. Issuing shares is a familiar, standardised process regulated by the Corporations Act 2001 (Cth), and investors know exactly what rights they are getting. In a unit trust, everything depends on the individual trust deed: how units are issued, what rights attach to them, and how a new issue affects existing unitholders. An investor has to read and rely on a deed drafted for someone else's business, which is a harder sell.
Borrowing has a tax-shaped problem. Under s 99A of the Income Tax Assessment Act 1936 (Cth), any trust income that no beneficiary is presently entitled to by the end of the financial year is taxed in the trustee's hands at the rate Parliament has set for that section, which is the top marginal rate: currently 45%, plus the 2% Medicare levy. Most trustees therefore distribute all income every year, and the trust never builds the cash buffer that a lender likes to see before it advances a loan. A unit trust can still borrow, but the practical reality is that debt servicing comes out of income that would otherwise be heading to the unitholders.
If the structure is failing purely because the business now needs external capital, moving to a company is a genuine option. The CGT rollover in Subdivision 124-N of the Income Tax Assessment Act 1997 (Cth) lets a trust transfer all of its assets to a company in exchange for shares without triggering a capital gain, provided the requirements are met and both entities choose the rollover. There is a trap: the rollover can be reversed if the trust does not wind up within six months. And the rollover deals with capital gains tax only, so stamp duty and other consequences need separate advice.
Are your unitholders still on the same page?
Because distributions track unit holdings, a unit trust generates fewer arguments about who gets what than a discretionary trust, where the trustee chooses the beneficiaries each year. The disputes that do occur cluster around events: a new issue of units that dilutes existing holders, a unitholder selling units to an outsider, or a redemption. Each of those events needs a mechanism that the deed actually supports.
A unitholders agreement works like a shareholders agreement for the trust. It can set out pre-emptive rights so existing unitholders get first refusal on any transfer, a valuation method, rules for issuing new units and a process for resolving deadlock. If the deed is silent on these events, the trustee has room to make decisions that some unitholders will not like, and the disagreement lands in a lawyer's office later.
Is the trustee doing its job?
Trustee conduct is worth a deliberate check, because a failure here is expensive. The general law duties of a trustee include acting honestly, acting in good faith, and avoiding conflicts of interest, and the trust deed adds specific powers and obligations on top. Where the trustee is a company whose board is made up of the unitholders, disputes are rare, because the people complaining and the people deciding are the same people. Where the trustee is a separate entity, or where one unitholder controls the trustee, friction is much more common.
If unitholders believe the trustee has breached its duties, the options depend on the deed and the facts. Removal and replacement of the trustee usually requires a specified majority of unitholders, and the deed sets out the mechanism. Whether a breach has actually occurred, and what remedy is available, is a judgement call a lawyer has to make on the specific facts.
Is the tax outcome what you set the trust up for?
A trust does not generally pay tax on its income. Under Division 6 of the Income Tax Assessment Act 1936, unitholders are taxed on their share of the trust's net income in their own hands. The exception is the s 99A situation described above: income left undistributed by 30 June is taxed at 45% plus the Medicare levy. The first tax check is therefore simply whether the trust has been distributing everything each year, and whether that still suits the unitholders' personal positions.
The signature tax benefit of a unit trust over a company is the capital gains tax (CGT) discount. A gain on a CGT asset held for at least 12 months can be a discount capital gain under s 115-25 of the Income Tax Assessment Act 1997. For individuals and trusts the discount is 50% of the gain, not 50% of the sale price, which is a common misreading. One date matters. Under s 115-100, the general 50% discount for individuals and trusts applies only to CGT events happening before 1 July 2027. From that date the general discount ends, with the concession retained only for new residential dwellings and affordable housing. A trust that sells a long-held asset before that date locks in the discount; a sale after it does not. Complying superannuation funds keep a smaller 33⅓% discount throughout.
The discount is designed to survive the trip through the trust. Take a trust that makes a $100,000 capital gain on an asset it has held for more than 12 months. The trust applies its 50% discount, leaving $50,000 to flow to an individual unitholder. For tax purposes the unitholder is treated as having made the gain, grossed back up to its original $100,000, so they can apply their own capital losses against it and then their own 50% discount under s 115-215 of the Income Tax Assessment Act 1997. An individual with no losses ends up taxed on $50,000. A corporate unitholder is different: companies do not get the discount, so the grossed-up gain is taxed in full. If your unitholders are companies, the trust is quietly losing the tax advantage it was set up for.
Are the franking credits flowing, and is your trust fixed for tax?
If the trust holds shares in companies that pay franked dividends, the franking credits can flow through to the unitholders. Where a franked distribution is made to the trustee, a unitholder who is entitled to that distribution includes the franking credit in assessable income and claims a tax offset of the same amount under s 207-5 and Subdivision 207-B of the Income Tax Assessment Act 1997. For unitholders on lower marginal rates this can materially reduce the tax bill on the dividend.
The question that decides whether a unit trust works for tax purposes, and the one most deeds get wrong, is whether it is a fixed trust. Under s 272-65 of the Income Tax Assessment Act 1936, a trust is a fixed trust only if persons have fixed entitlements to all of the income and all of the capital of the trust. A fixed entitlement must be vested and indefeasible under s 272-5, which broadly means the current interest cannot be taken away. A deed that lets the trustee issue further units, redeem units or vary entitlements can fail the test, because the entitlement is defeasible.
The stakes are highest where an SMSF holds units. Under s 295-550 of the Income Tax Assessment Act 1997, income that an SMSF derives as a beneficiary of a trust other than through a fixed entitlement is non-arm's length income, taxed at the top marginal rate of 45% instead of the usual concessional 15% rate for complying funds. Income derived through a fixed entitlement is taxed at the concessional rate unless the arrangement itself was not at arm's length. An SMSF investing in a unit trust whose deed is not truly fixed can therefore face a 45% tax bill on what it assumed was a 15% investment.
If the deed fails the fixed trust test, amending it to tighten the entitlements is possible, but a poorly handled amendment can cause a resettlement, where the trust is treated as ending and a new trust starting for tax purposes, which can trigger its own capital gains and other consequences. Whether a change to the deed amounts to a resettlement depends on how far the amendment goes, and that is squarely a matter for advice.
Getting a second opinion on your unit trust with Artificer Legal
None of this check produces a DIY verdict. The documents and decisions that determine the answers are the trust deed, the tax history and the unitholders' circumstances. A lawyer at Artificer Legal can help with the judgement calls this article cannot make for you: reading the deed to work out what the trustee can and cannot do, forming a view on whether the trust is a fixed trust and what that means for SMSF unitholders, drafting a unitholders agreement that matches the deed, and structuring a move to a company under Subdivision 124-N including the wind-up timing. Because tax consequences are usually part of the picture, we work alongside your accountant rather than instead of them.
Why most unit trust deeds fail the fixed trust test
The most expensive mismatch in this whole check is the gap between a deed that is fixed in a commercial sense and a trust that is fixed for tax purposes. The definition in s 272-65 is rigid: fixed entitlements to all of the income and all of the capital, each vested and indefeasible. Most deeds that give the trustee flexibility, such as the power to issue further units or redeem units, fail the test, and the cost shows up where it hurts: an SMSF unitholder taxed at 45% instead of 15%, and a structure that cannot rely on the fixed trust rules it was designed around.
Run this check regularly, not just when something goes wrong. Can the trust raise the money the business needs? Are the unitholders aligned and is the trustee performing its duties? Is the tax outcome, including the CGT discount on any sale before 1 July 2027, what the structure was set up for? And do the franking credits and the fixed trust status actually hold up? Answer those questions honestly and you will know whether your unit trust is still earning its keep or whether it is time to restructure.