An investor has asked for a stake in the business, or a second family wants in on the deal, or your accountant has told you the business has grown past a simple structure. Whatever triggered it, the same question is now on the table: whether the business should move into a trust, and if so, whether that trust should be a family trust or a unit trust. The answer turns less on the tax rate in any single year and more on who you want to be able to own the business, decide where its profit goes and get out again in five years' time.
The two structures on the table
A trust is an arrangement in which a trustee holds and manages assets for the benefit of others, the beneficiaries. Both structures share the same skeleton: a trust deed that sets the rules, a trustee who runs the trust, a defined group of beneficiaries and an annual obligation to deal with income and capital. They differ in who gets what and who decides.
In a family trust, which is usually called a discretionary trust, the trustee has the discretion to decide each year which beneficiaries within a defined class receive income and capital. Under s 101 of the Income Tax Assessment Act 1936 (Cth) (ITAA 1936), a beneficiary only becomes presently entitled to income when the trustee exercises its discretion in that beneficiary's favour, which is why the annual resolution matters so much. In a unit trust, beneficiaries hold units rather than being named in a class, and each unitholder is entitled to income and capital in proportion to the units they hold.
For most owners the real question is narrower than the headline: it is family trust versus unit trust, with a third variable cutting across both, namely whether the trustee is an individual or a company (a corporate trustee). It is also worth flagging two assumptions that often turn out to be wrong. A family trust is not a vehicle for selling a 10 per cent stake to an outsider; the trustee cannot simply hand a slice of the business to someone outside the class of beneficiaries. And a unit trust is not a vehicle for the trustee to pick and choose distributions each year to minimise tax, because entitlements follow the units. If either of those assumptions is part of your plan, test it before you settle anything.
The factors that should drive the choice
Who decides where the profit goes
This is the defining difference between the two structures:
- Family trust: the trustee decides each year who in the class of beneficiaries receives income and capital, within the limits of the deed. That discretion allows distributions to be shaped around the family's circumstances, but it comes with a deadline: to make a beneficiary presently entitled to the year's income, the trustee must pass a valid resolution by 30 June, and the ATO's guidance is that a resolution made after that date is not effective for the year. Where no beneficiary is made presently entitled, s 99A of the ITAA 1936 taxes the income in the trustee's hands at the top marginal rate.
- Unit trust: the trustee's discretion is largely removed. Unitholders are entitled to the trust's income in proportion to their units, and they are taxed on that share in their own hands. The result is predictable and simple to explain, but there is little room to move income between owners from one year to the next.
Whether outsiders can buy in
If outside capital, partners or co-owners are anywhere in the plan, this factor usually decides the question:
- Family trust: designed for a single family group. Bringing in an unrelated investor is not a matter of selling them a slice; they would need to be added to the class of beneficiaries, and most owners instead restructure the whole arrangement, which can trigger tax and duty consequences.
- Unit trust: ownership is fixed by units, so an investor can be admitted by issuing new units or buying existing ones at an agreed valuation. The deed can provide for pre-emptive rights, different unit classes and transfer rules, which is why unit trusts are the usual choice for joint ventures, property syndicates and businesses with several unrelated owners.
What an exit looks like
How an owner gets their capital back depends on how fixed their entitlement is:
- Family trust: beneficiaries do not hold a fixed slice of the business, so one person cannot easily cash out their share. Exits tend to happen through the deed's succession mechanisms, such as the appointor's powers, or through a broader restructure.
- Unit trust: units can be transferred, redeemed or bought back under the deed, with valuation methods written in. That makes planned exits, buy-outs and partial sales workable, which matters to investors who want to know how they will get their money back.
How the tax lands
Trusts are tax-transparent: the income is taxed in the hands of the beneficiaries who are presently entitled to it under s 97 of the ITAA 1936, not in the trust's own hands:
- Beneficiaries pay tax at their own marginal rates, which is what makes family trusts useful for spreading income, subject to tax advice each year.
- If no beneficiary is made presently entitled by 30 June, the trustee is assessed under s 99A at the top marginal rate. This is the most common and the most expensive mistake in trust administration.
- Where the trustee or a beneficiary is a company, the rate is 25 per cent for base rate entities and 30 per cent for others, per the ATO's company tax rates.
- The 50 per cent CGT discount on assets held for more than 12 months applies to individuals and flows through a trust to individual beneficiaries; companies do not get the discount, so a trust holding growth assets can be more attractive than a company holding them directly.
- A family trust can make a family trust election to access concessions such as franking credits and the trust loss rules, but the election locks the trust to one family group, and distributions outside that group attract family trust distribution tax at the top marginal rate.
Every year's distribution decision deserves tax advice; the structure just sets the frame.
Asset protection and who wears liability
A trust is not a separate legal entity. The trustee is the legal owner of the trust's assets and the party that enters contracts, so contracts and leases should name the trustee "as trustee for" the trust. The ATO records the trust's registrations in the trustee's name for exactly this reason. Who wears the risk then comes down to the trustee you choose:
- Individual trustee: the trustee is personally liable for the trust's debts, subject to a right of indemnity from the trust's assets. If you are the trustee, business risk sits directly on your shoulders.
- Corporate trustee: a proprietary company with limited liability is the usual answer, and it also gives the structure continuity if an individual dies or loses capacity. The shield is not complete, because banks, landlords and major suppliers routinely ask directors for personal guarantees.
Both structures can use a corporate trustee, so this factor does not choose between family and unit trusts; it shapes whichever one you pick.
Compliance, records and banking comfort
A trust has its own tax file number, the trustee registers it and lodges a trust tax return each year, and the trustee applies for an ABN if the trust carries on an enterprise. A corporate trustee has its own ACN. Unit trusts need a register of unitholders and unit certificates, and both structures need written trustee resolutions that match the deed. None of this is optional paperwork: it is the evidence that supports who was taxed on what. Capital gains streamed to beneficiaries must be recorded within two months of year end, while income resolutions are due by 30 June. Banks are familiar with both structures, but they scrutinise discretionary trusts closely and commonly require guarantees, while the fixed entitlements of a unit trust are often easier to explain to a financier.
Getting the structure right with Artificer Legal
Choosing between the two structures is the first decision, not the last. The heavy lifting is in the trust deed and the documents around it, which is where an Artificer Legal practitioner earns their keep.
A practitioner would start by stress-testing the assumptions behind the choice: whether the class of beneficiaries is defined to include everyone you actually want to benefit, whether a unit trust deed covers the issue, transfer, pre-emption and valuation mechanics you promised an investor, and whether the vesting date and the amendment power suit your time horizon. They would then model the downside, which is where most owners are surprised: what happens if a resolution misses 30 June and s 99A applies, if a family trust election is breached and family trust distribution tax is triggered, if a director's personal guarantee is called on, or if moving assets in or out of the trust attracts duty or capital gains tax.
Then comes the drafting. The trust deed is a deed, so execution formalities matter, and it should be tailored rather than taken off a shelf. Where the original deed allows, a deed of variation can amend the rules as the business evolves. The supporting documents follow: unit certificates and a unitholder register for unit trusts, annual trustee resolutions, and, where the trust holds the shares of a trading company, a company constitution and a shareholders agreement so the people behind the trust are aligned. Because a family trust election can generally be made only once and revoked only in limited circumstances, it is the kind of decision to take with advice before the election form is lodged, not after.
Start with ownership and control
The factor that separates the two structures is not the tax rate in any single year. It is who you intend to be able to own a slice of the business, and who decides where the profit goes. If ownership will stay inside one family and you want the flexibility to shape distributions each year, a family trust is the usual fit. If you are going to take on investors, co-owners or syndicate members whose stake must be defined, valued and transferable, a unit trust is the structure that can do that. The mistake owners make is choosing on the tax outcomes of year one and discovering in year three that the structure cannot do what the business now needs, when restructuring is expensive and can itself trigger duty and tax.
A trust is simply a trustee holding and managing assets for beneficiaries, and the two structures differ in how fixed the entitlements are. Family trusts give the trustee discretion over distributions within a defined class, which buys flexibility and tax planning room but makes outside ownership difficult. Unit trusts fix entitlements to units, which makes investors, valuation and exits workable but removes the trustee's discretion. Whichever you choose, the trust deed sets the rules, valid resolutions must be made by 30 June, the income is taxed in the beneficiaries' hands, and the trustee wears the liability unless a corporate trustee and the right documents are in place. Get those foundations right, and the structure will carry the business for decades; get them wrong, and the fix will cost more than the setup ever did.