What is Unit Trust?
A unit trust is an investment structure that divides ownership into units, each representing a fixed portion of the trust’s assets and income. Investors (called unit holders) receive distributions according to how many units they hold, much like shareholders receiving dividends.
Unlike a company, a unit trust generally acts as a flow-through entity for tax purposes. This means the trust itself doesn’t usually pay tax; instead, each unit holder is taxed on their share of the income.
Unit trusts are widely used across Australia for property syndicates, joint business ventures, and family wealth structures because they offer both clear ownership rights and flexible asset management.
How a Unit Trust Works
In a unit trust, the trustee, either an individual or a corporate entity, manages the trust’s assets and distributes income according to the number of units each investor holds.
For example, if you own 30% of the units, you’re entitled to 30% of the trust’s income and capital gains. This transparent ownership model makes unit trusts an attractive option for unrelated investors pooling funds for shared investments.
Types of Unit Trusts: Fixed vs Non-Fixed
The ATO classifies unit trusts into two broad categories:
Fixed Unit Trusts: Each unit holder’s interest in income and capital is clearly defined and cannot be changed without altering the trust deed. Fixed trusts are preferred for their certainty and eligibility for tax concessions.
Non-Fixed Unit Trusts: Trustees may have discretion over how income is distributed. These are less common and may complicate tax treatment.
For a unit trust to qualify as a fixed trust under ATO rules, the trust deed must clearly specify unit holders’ rights and prevent any discretionary variation by the trustee.
Tax Treatment of Unit Trusts
A major advantage of unit trusts is their tax transparency. The trust itself is not generally taxed as long as all income is distributed to unit holders. Each investor then declares their share of the income on their individual tax return, based on its character — such as rent, dividends, or capital gains.
However, there are a few important points to note:
- Retained income is taxed at the highest marginal rate.
- Losses remain within the trust and cannot be offset against personal income.
- Franking credits and CGT discounts may pass through to investors, depending on eligibility.
- Capital Gains and Cost Base Adjustments
If a unit trust sells an asset, for example, an investment property, the resulting capital gain is allocated to unit holders in proportion to their ownership.
Where the asset has been held for at least 12 months, eligible unit holders (such as individuals or SMSFs) may claim the 1/3 or 50% CGT discount.
However, investors must track tax-deferred distributions carefully. These reduce the cost base of the units, which can increase the capital gain when the units are eventually sold.
Example:
If you purchase units for $100,000 and receive $10,000 in tax-deferred income, your adjusted cost base becomes $90,000. If you later sell your units for $120,000, your capital gain will be $30,000, not $20,000.
State Taxes and Stamp Duty Implications
In some Australian states, transferring units in a trust that owns property can attract stamp duty, based on the underlying property value. Land Tax rules vary between states, in NSW, for instance, the classification of a unit trust as “fixed” or “non-fixed” affects access to land tax threshold.
Before transferring or issuing new units, it’s essential to confirm the state-based tax implications to avoid unnecessary costs or penalties.
Advantages of a Unit Trust Structure
Unit trusts offer a blend of flexibility, control, and tax transparency that appeals to both investors and business owners.
Key benefits include:
- Defined ownership: Clear and measurable entitlement to income and capital.
- Tax efficiency: Flow-through taxation avoids double taxation.
- Access to CGT discounts: Possible for eligible investors after 12 months.
- Asset protection: When managed under a corporate trustee, personal exposure is limited.
- Scalability: Ideal for joint ventures or investment syndicates pooling funds.
Common Risks and Limitations
While versatile, unit trusts come with compliance and structural considerations:
- Losses are trapped: They cannot be distributed to investors.
- Undistributed income is penalised: Taxed at the highest marginal rate.
- Stamp duty can apply: Even small unit transfers may trigger state duties.
- Complex administration: Record-keeping and trust deeds must stay compliant.
The trust’s assets are subject to unit holder’s risk exposure: Unit holders control the trust via their voting rights, thus if a majority of units end up in the hands of creditors (for example, due to a unit holder’s insolvency), those creditors could effectively take control of the trust’s decisions and operations.
When to Use a Unit Trust
A unit trust is best suited for:
- Property investments held by multiple unrelated investors
- Joint ventures where partners contribute capital in defined proportions
- Family groups that prefer fixed ownership rights instead of discretionary control
However, for structures needing flexibility in income distribution or where profits are reinvested, a discretionary trust or company might be more practical.
Setting Up a Compliant Unit Trust
Establishing a unit trust requires careful documentation and registration. The process typically involves:
- Drafting a compliant trust deed
- Appointing a trustee (often a corporate trustee)
- Issuing units to investors
- Registering for an ABN and TFN
- Maintaining clear financial and distribution records
- Getting professional advice from an accountant or trust specialist ensures your structure aligns with both ATO rules and your investment goals.
Create a Tax-Effective Unit Trust Structure for Your Property or Business Investments
Unit trusts remain one of the most tax-effective and transparent investment structures in Australia — ideal for those who value defined ownership, capital gains flexibility, and asset protection.
However, success with this structure depends on getting the details right from the start: your trust deed, trustee setup, and tax compliance all determine whether your trust delivers its intended benefits.
If you’re exploring a unit trust for your property or business investments, our team at Chan & Naylor can help you establish a compliant, efficient, and strategically designed trust structure that works for your financial future.
