A unit trust is a commonly used structure where the business is a venture between several unrelated interests. Beneficiaries have a fixed interest in all the property that is the subject of the trust. A unit trust then 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.

Key Players Involved in Establishing A Unit Trust

Trustee

The Trustee is normally a shelf company, set up specifically to act as the unit trust’s Trustee. Unitholders appoint the Trustee, and the Trust Deed contains the Trustee’s powers. The Trustee legally owns the trust, and may be held personally liable for debts incurred in their capacity as a trustee. Unitholders beneficially own the trust. 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.

Beneficiary

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

Trust Deed

The Trust Deed outlines the Unit Trust’s purpose, the rights and obligations of the trustee and unit holders, the trustee’s powers and identifies the parties. The Trust Deed also includes issues such as what is to happen if someone wants to sell their units or sell the unit trusts underlying assets and wind the unit trust up.

What is a Unit?

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

Unit v 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 confer on the shareholder any legal or equitable interest in the company’s assets.

On the other hand, a unit under the Trust Deed confers on the unit holder a proprietary interest in all the property subject to the trust. A unitholder also has an equitable interest both 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 prudent to have a Unit Holders’ Agreement. This Agreement outlines each unit holder’s rights and obligations in respect to one another. In this way, a Unit Holders’ Agreement is akin to a Partnership Agreement.

Advantages of a Unit Trust

Unit trusts do not, generally, have the asset protection advantages for unit holders 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.

Conclusion

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 experienced business lawyers on 1300 544 755.

Claudette Yazbek

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