A unit trust differs to a discretionary trust as the beneficiaries’ rights to income and capital are subject to the discretions on the part of the trustee. But, why is it used? And when? This article will concisely outline what exactly is a unit trust, and unpack its advantages.

Establishing a Unit Trust

There are a number of key people and documents involved in the establishment of a unit trust.

Trustee

The trustee is normally a shelf company, set up specifically to act for the unit trust. Unitholders appoint the trustee, and their powers are contained within the trust deed. The trustee legally owns the trust and may be held personally liable for any debts incurred whilst as the trustee. This is an attractive structure because of a company’s perpetual existence. That is, managing the unit trust is not complicated by the trustee’s “death” or an inability to manage its own affairs.

Beneficiaries

The beneficiaries of a unit trust are usually referred to as “unitholders.” Unitholders have fixed rights to the trust’s income and capital.

Trust Deed

The trust deed is a document that outlines the:

  • unit trust’s purpose;
  • rights and obligations of the trustee and unitholders;
  • the trustee’s powers;
  • identities of the parties;
  • process of selling units; and
  • process of closing the unit trust.

What is a Unit?

A unit is a piece of property. It entitles its unitholder to a specific amount of the income and capital of the unit trust. The amount is fixed and is determined at the time that the units are issued. Or, at a time otherwise agreed by the unitholders and the trustee. Because the rights are recognised as a form of property, they can be bought and sold. The unitholder’s entitlement to future payments of income and capital assigns a value to the unit. This means that other people are prepared to pay and acquire the unit from the unitholder.

What is the Difference Between a Unit and a Share?

On its face, it can be difficult to distinguish between a unit in a unit trust and a share in a company. They are both considered pieces of property. A share, however, does not grant the shareholder any legal or equitable interest in the company’s assets.

On the other hand, a unit grants its unitholder a proprietary interest in all the property under the trust. A unitholder also has an equitable interest in the unit trust’s underlying capital and income.

The amount’s character as capital or as income in the unitholder’s hands when distributed to a unitholder under a trust deed will depend on its character in the trustee’s hands.

Unit Holders’ Agreements

Unrelated parties typically use unit trusts to co-own assets. It is then important to have a unitholders’ agreement. This agreement outlines each unitholder’s rights and obligations in respect to one another. In this way, a unitholders’ agreement is similar to a partnership agreement.

Tax Advantages of a Unit Trust

Unit trusts do not, generally, have the asset protection advantages for unitholders that discretionary trusts have for beneficiaries. But they are an attractive business structure because of the income tax advantages.

A unit trust, unlike a company, is not a separate taxable entity and as such, the trust’s income or capital is distributed pre-tax. Another advantage is that the trustee’s creditors are not able to look to trust property in the event of the trustee’s insolvency. This is because property held on trust lies outside that which is available to satisfy the trustee’s creditors. Unit trusts are also subject to a lesser level of regulation, meaning that the trust’s financial results may remain confidential, and its accounts do not need to be audited.

Key Takeaways

A unit trust is an attractive structure to use in the conduct of business because of the income tax advantages it presents. It is important though first to speak with your accountant about whether a unit trust is the most appropriate business structure for your financial circumstances. If you have any questions or need assistance in setting up your unit trust, you should speak with one of LegalVision’s business lawyers on 1300 544 755 or fill out the form on this page.

About LegalVision: LegalVision is a tech-driven, full-service commercial law firm that uses technology to deliver a faster, better quality and more cost-effective client experience.
Claudette Yazbek

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