Discretionary Trust Vs Unit Trust: Key Differences For Australian Businesses

If you’re running (or about to start) an Australian business, choosing the right structure can make a huge difference to how you manage risk, bring in business partners or investors, and share profits.

Two common options we see small business owners weighing up are a discretionary trust and a unit trust. On paper, they can look similar: both involve a trustee holding business assets “on trust” for beneficiaries. In practice, though, the way profits and control work can be very different.

This guide breaks down the discretionary trust vs unit trust decision in plain English, from a small business perspective. We’ll walk through the key differences, the pros and cons of each, and the practical questions to ask before you commit (because changing later can be costly and time-consuming). It’s general information only and not tax advice - for tax outcomes and planning, speak with a registered tax agent or accountant.

What Is A Discretionary Trust And What Is A Unit Trust?

Before you can compare a discretionary trust vs unit trust, it helps to be clear on what a “trust” is in a business context.

A trust is a legal relationship where one party (the trustee) holds assets and runs the trust for the benefit of other parties (the beneficiaries). The rules are set out in a legal document called the trust deed.

What Is A Discretionary Trust?

In a discretionary trust (often called a “family trust”), the trustee has discretion to decide:

• which beneficiaries receive trust income or capital; and
• how much each beneficiary receives (within the boundaries of the trust deed and tax rules).

This flexibility is one of the main reasons discretionary trusts are popular with many privately-owned small businesses.

What Is A Unit Trust?

In a unit trust, beneficiaries hold “units” (similar to shares). Generally:

• each unit holder has a fixed entitlement to income and capital based on the number of units they hold; and
• distributions usually follow those unit holdings (so it’s less flexible than a discretionary trust).

Because ownership is clearly quantified, unit trusts are often used when there are multiple business owners contributing capital and you want a transparent, investor-friendly split of profits. (That said, how “investor-friendly” a structure is in practice depends on the deed terms, governance, and what the investors are actually looking for.)

Whichever type you’re considering, it’s worth understanding the admin basics early (for example, ABN/TFN registration and whether a corporate trustee is appropriate). These practical steps are often missed until “go time”, when you’re opening bank accounts or signing leases. The trust requirements are a good place to start when mapping out what you’ll need.

Discretionary Trust vs Unit Trust: The Key Differences That Matter For Small Businesses

When business owners ask us about the difference between unit trust and discretionary trust structures, the conversation usually comes back to a few core themes: who controls distributions, how ownership is defined, and how you plan to grow.

1) How Profits Are Distributed

Discretionary trust: The trustee can distribute trust income among eligible beneficiaries in varying proportions each year (subject to the deed and tax compliance).

Unit trust: Distributions are typically made to unit holders in proportion to units held (for example, if you own 60% of the units, you generally receive 60% of the distributable income).

Why this matters: If your business is likely to have changing profit-sharing needs (for example, one year you want to allocate more to one person due to personal circumstances), discretionary can be attractive. If you need predictability (especially with co-owners), unit trusts often feel “cleaner”.

2) Ownership And “Who Gets What” On Exit

Discretionary trust: Beneficiaries don’t usually “own” a fixed percentage of the trust. Their entitlement depends on trustee discretion (and any vesting or capital distribution rules in the deed).

Unit trust: Unit holders have a clear ownership interest through their units, which can be easier to value, transfer, or sell.

Why this matters: If you want a structure where each owner can point to a defined stake (especially for buy/sell discussions or future investors), a unit trust can be more straightforward.

3) Control And Decision-Making

In both structures, the trustee runs the trust. In practice, control depends on who is the trustee and who controls the trustee.

• If the trustee is an individual, that person has significant control (which can be risky if there are multiple stakeholders).
• If the trustee is a company, control is managed via company directors/shareholders, which can be more stable and easier to govern.

For many businesses, using a corporate trustee is a practical way to keep administration tidy and avoid “what happens if the individual trustee is unavailable?” issues. If you’re still deciding whether to operate through a company at all, a company set up can be part of the overall trust planning (for example, establishing a company to act as trustee).

4) Bringing In Business Partners Or Investors

Discretionary trust: Can work well for family-run or closely-held businesses. However, external parties often prefer more certainty around entitlements and governance.

Unit trust: Often more attractive where multiple unrelated parties contribute capital and expect a clear “percentage ownership” and defined profit split.

Why this matters: If you’re planning to scale with outside capital (or want a structure that feels familiar to investors), a unit trust can be easier to explain and negotiate - although investors will usually still focus on the underlying deal terms, rights, and governance, not just the label of the structure.

5) The “Discretionary Unit Trust” Question

You may also come across the term discretionary unit trust. This can mean different things depending on how it’s used (sometimes it refers to hybrid-style arrangements, sometimes it’s used casually to describe a trust where some entitlements are fixed and others are discretionary).

In most real-world cases, “hybrid” arrangements can increase complexity and create tax and compliance risks if not drafted carefully. If you’re considering anything beyond a standard discretionary trust or standard unit trust, it’s a good idea to get the deed and structure reviewed before you start trading.

Which Structure Is Better For Your Business Goals?

There isn’t one “best” option. The right choice depends on how your business actually operates, who’s involved, and what you want to achieve over the next few years.

Here are some common scenarios we see with small businesses.

A Discretionary Trust May Suit You If…

• You want flexibility to distribute profits across a family group (or a broader group of beneficiaries) year-to-year.
• You’re building a long-term family business and want a structure that can adapt as family circumstances change.
• You want to manage risk by separating business assets from individuals (the level of asset protection will depend on the overall setup, your conduct, personal guarantees, and your specific circumstances).
• You don’t need fixed “ownership percentages” for co-founders or external stakeholders.

That said, the flexibility of a discretionary trust is also the feature that can cause friction if multiple unrelated people are involved. If one person controls the trustee, and others expect a set split of profits, you can end up in disputes quickly unless governance is clear.

A Unit Trust May Suit You If…

• You have multiple business owners (especially unrelated parties) who want a defined stake.
• Each owner is contributing capital and you want distributions to reflect those contributions in a transparent way.
• You want a structure that’s easier to value for potential investors, buyouts, or future exits (noting that valuation still depends on the business, the deed, and the rights attached to the units).
• You want clear rules around transfers (who can buy/sell units and when).

For unit trusts, it’s common to put a clear governance document in place among unit holders so everyone is on the same page about decision-making and what happens if someone wants to exit. An Unitholders Agreement can help set expectations around voting, transfers, funding contributions, and dispute pathways.

What If You’re Not Sure Yet?

If you’re still early-stage (maybe you haven’t signed a lease, hired staff, or launched), it’s worth mapping the “next 12-24 months” and working backwards:

• Are you planning to bring in a co-founder?
• Will you need investors, or are you bootstrapping?
• Do you need predictable profit splits?
• Do you want to retain flexibility to change distributions each year?

Often, the right answer becomes clearer when you talk through how money, control, and risk will work in your actual business (not just in theory).

Tax, Compliance And Administration: What Business Owners Often Overlook

Trust structures are often discussed for tax planning reasons, but for most small business owners, the “day-to-day practicalities” matter just as much. Even a great structure can become painful if you’re constantly stuck in admin or dealing with avoidable misunderstandings. For tax advice tailored to you, it’s important to speak with a registered tax agent or accountant.

Ongoing Administration (Yearly And Day-To-Day)

Both discretionary trusts and unit trusts typically require:

• a trust deed (kept current and complied with);
• proper accounting and trust records;
• trust tax returns and compliance tasks; and
• trustee resolutions (particularly around distributions).

It’s also common for business owners to mix personal and business money early on, which can create messy loan account issues. For example, if you’re operating with a corporate trustee and you’re putting personal funds in (or taking funds out), your accountant may treat this as a loan between you and the trustee company and track it through loan accounts. These can be manageable, but they should be documented and tracked properly to avoid disputes and tax complications. For background, see our article on director loan arrangements in a company context.

Compliance Beyond The Trust Itself

Choosing between a discretionary trust vs unit trust doesn’t remove your broader business legal obligations. You’ll still need to consider things like:

• Customer terms and consumer law: if you sell products or services, you’ll need contracts/terms that reflect your business model and comply with the Australian Consumer Law (ACL).
• Privacy: if you collect customer information (even just via online enquiries), you’ll usually need a Privacy Policy that matches how you collect, store and use data.
• Employment: if you’re hiring staff, your structure doesn’t change the fact you need compliant documents and processes. An Employment Contract helps set expectations around duties, pay, confidentiality, and termination.

In other words, think of your trust as the “ownership and profit-sharing framework” - you still need the right legal foundation around how you trade and operate.

What Legal Documents Should You Put In Place With A Trust Structure?

Whether you choose a discretionary trust or a unit trust, strong documentation is what turns a structure into something workable (and reduces the risk of disagreements later).

Here are documents we commonly see businesses consider alongside a trust structure.

Trust Deed (Essential)

This is the rulebook for your trust. It defines key things like:

• who the beneficiaries or unit holders are (and how they can change);
• how income and capital can be distributed;
• trustee powers and limitations; and
• how the trust can be varied or wound up.

A deed that’s poorly drafted (or a “one size fits all” deed that doesn’t match your business reality) can cause operational headaches and trigger disputes at exactly the wrong time - like when you’re trying to raise capital, sell, or restructure.

If You Use A Corporate Trustee: Company Governance Documents

If the trustee is a company, you should also think about how that company is governed. For example:

• a Shareholders Agreement if more than one person owns the corporate trustee (so it’s clear who controls the trustee company and how decisions are made);
• a company constitution or replaceable rules (depending on the setup); and
• director and shareholder records kept properly.

This is especially important when the trust is used for a trading business. If the trustee controls the bank accounts, signs the lease, and employs staff, then “who controls the trustee” becomes a very real issue.

Unitholders Agreement (Unit Trusts Especially)

With unit trusts, your unit holders may be business partners, family members, or investors. A Unitholders Agreement often covers:

• how key decisions are made (and what needs unanimous approval);
• what happens if someone wants to sell or transfer units;
• how new units can be issued (and dilution rules);
• funding obligations (who contributes cash when the business needs it); and
• exit scenarios and dispute resolution.

This kind of agreement can be the difference between a smooth operating relationship and an expensive dispute when priorities change.

Core Trading Documents (Regardless Of Structure)

Your trust structure won’t protect you from commercial misunderstandings if your contracts are unclear. Depending on how your business operates, you may need:

• Client or customer terms (particularly if you provide services, subscriptions, or deliverables over time);
• Supply and contractor agreements if others deliver key parts of your product or service; and
• Employment and workplace documents if you’re building a team.

As your business grows, these documents become part of your “business systems” - and they’re often reviewed in due diligence if you ever sell or raise funds.

Key Takeaways

• When comparing a discretionary trust vs unit trust, it often comes down to flexibility vs certainty: discretionary trusts can allow flexible distributions, while unit trusts usually distribute based on fixed unit holdings.
• The difference between unit trust and discretionary trust structures often shows up most when you have multiple owners: unit trusts can be easier for co-owners and some investors to understand because ownership is clearly defined (though the details still matter).
• Control usually comes down to who controls the trustee - and if you use a corporate trustee, you should also document decision-making at the company level.
• Trusts still require strong day-to-day compliance (record-keeping, resolutions, tax admin), and poor admin can undermine the benefits of the structure.
• For unit trusts, an Unitholders Agreement can help prevent disputes by setting clear rules around voting, transfers, funding, and exit pathways.
• No matter which trust you choose, you’ll still need strong trading foundations like customer terms, an appropriate Privacy Policy, and compliant employment documents where relevant.

If you’d like a consultation on choosing between a discretionary trust and a unit trust for your Australian business, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.