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Choosing the correct business structure is one of the most important decisions you will make when setting up your business. One particular business structure you can leverage is a unit trust. If your business involves independent parties coming together to invest in a project like land development, then a unit trust business structure may be suitable for you. This article explores unit trusts and the benefits it offers as an investment vehicle. 

What Is a Unit Trust?

A unit trust is a type of trust arrangement that people typically use as an investment vehicle. 

A trust is a legal arrangement where the legal ownership of assets is separate from the beneficial ownership. The legal owner, called a trustee, may deal with the asset as it deems fit. Likewise, any loss or profit made of those assets is for the benefit (or loss) of the beneficial owner. These individuals are called the beneficiary. 

The key feature of a unit trust is that the beneficiaries (or unitholders) of a unit trust hold a certain number of units in that trust. The trustee must distribute any trust income and capital in proportion to the number of units a unitholder holds. Notably, each unit is a fixed proportion of the beneficial ownership of the trust. It is very similar to shares in a company. 

Unit Trusts as an Investment Vehicle

A unit trust structure is often used by a group of independent parties who want to invest or co-own assets together. For instance, investors who want to come together to invest in the development of a property will typically leverage this trust structure. 

There are notable features of a unit trust that make them suitable as an investment vehicle. The following section will explore these features.

Clarity on Income Distribution

As mentioned, a vital feature of the unit trust structure is that each unitholder receives a distribution of the trust income in proportion to the units they hold. Notably, a unit trust will almost always distribute the trust income each year. If not, any leftover income is subject to the highest margin of tax – 45%. Any income distributed to a unitholder is taxed at that unitholder’s applicable tax rate.

The fixed distribution of the trust income clarifies the proportion of income they can expect to receive. The clarity also provides independent parties with the comfort to invest together. 

By contrast, in a discretionary trust, the trustee has the power to decide which beneficiaries receive a trust income and how much those beneficiaries receive. In a company structure, the directors can decide each year whether to distribute income to company shareholders as dividends or not. Thus, the same tax incentive to distribute the income is not there for companies.

Flexibility to Transfer Units

Transferring units in a unit trust is relatively straightforward. This means people or entities can become or cease to become unitholders of the trust more easily than other trust structures like a discretionary trust. The process to transfer units is very similar to how you would transfer shares in a company.  

However, the process can vary depending on the specific terms of a unit trust deed and any unitholders’ agreement.

Tax Benefits

Tax implications are an essential factor when deciding on a business structure. A unit trust structure can offer many tax benefits. Firstly, a unit trust is not a separate legal entity like a company, which means any income is distributed pre-tax. Therefore, the tax payable on the distributed trust income is the applicable tax rate of the unitholder. 

Secondly, unit trusts may be eligible for a 50% capital gains tax discount. This discount is available for any capital gains obtained by the trust from any assets it has owned for more than 12 months. This is a significant tax saving, especially where the business buys and sells assets like property. However, a 50% capital gains discount is only available to certain types of unitholders. For example, a corporate unitholder is not eligible, but individual unitholders are. 

An Example

Suppose you are a unitholder of a unit trust. The unit trust has bought a property, held it for more than 12 months and then sold the property for a profit of $50,000. Accordingly, the capital gains for the unit trust is $50,000. 

If there are two units in the trust and they are held by you and a third-party investor that is structured as a company, you and the investor are each entitled to $25,000 as trust income. Due to the operation of the 50% capital gains discount, you will only pay capital gains on 50% of the capital gains. In this case, the amount is $12,500. However, this discount is not available to the other unitholder who is structured as a company, so it must pay capital gains tax on the full $25,000.

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Key Takeaways

If you are looking to invest in a project, a unit trust structure may be suitable for you. As an investment vehicle, a unit trust offers various benefits, including:

  • clarity on the distribution of the trust income;
  • flexibility to transfer units in the trust; and 
  • certain tax benefits. 

If you are interested in discussing how unit trusts can help your business, contact LegalVision’s business lawyers on 1300 544 755 or fill out the form on this page.

Frequently Asked Questions

What is a unit trust?

A unit trust is a trust structure where the trustees distribute the trust income to the beneficiaries in proportion to the number of units the beneficiaries hold. The trustee does not have any discretion in distributing the trust income as it does in other structures like a discretionary structure. 

What are the tax benefits of using a unit trust?

Firstly, a unit trust is not a separate legal entity like a company, which means any income is distributed pre-tax. Therefore, the tax payable on the distributed trust income is the applicable tax rate of the unitholder. Secondly, unit trusts may be eligible for a 50% capital gains tax discount for any capital gains obtained by the trust from any assets it has owned for more than 12 months.

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