Discretionary Trust vs Unit Trust: What’s Best For Your Business?

Choosing a business structure is one of the most important decisions you’ll make as a founder or investor in Australia. The right structure can help with risk management, tax efficiency, and how easily you can bring in new stakeholders over time.

Two popular options are discretionary trusts (often called family trusts) and unit trusts. Both can hold and manage business or investment assets, but they work very differently - especially when it comes to how profits are shared, who has control, and how ownership changes are handled.

In this guide, we’ll explain how each trust works in plain English, unpack the pros and cons, and outline the practical steps to set up a trust the right way. By the end, you’ll have a clearer sense of which structure fits your goals - and where tailored legal and tax advice can make a real difference.

What Is A Trust In Australia?

A trust is a legal relationship where a trustee holds and manages assets for the benefit of others (beneficiaries). The terms are set out in a trust deed, which is a binding legal document that governs how the trust operates, who can benefit, and what the trustee can and can’t do.

Businesses and families often use trusts for a mix of reasons - for example, asset protection, flexible distributions, and succession planning. It’s a flexible framework that can be tailored to your goals, which is why trusts in Australia are common in small business, property investment, and family wealth structures.

There isn’t a one‑size‑fits‑all answer though. The “right” trust depends on who’s involved, how you want profits and capital to be allocated, and your plans for growth or exit.

Discretionary Trusts: How They Work

A discretionary trust (commonly called a family trust) allows the trustee to decide, within the rules of the deed and trust law, which beneficiaries are “presently entitled” to income and/or capital in a given year. In practice, that means the trustee determines distributions annually, rather than beneficiaries having a fixed percentage entitlement built into the structure.

Key Features

• Discretionary distributions: The trustee decides who benefits and to what extent each year (subject to the deed). Beneficiaries typically don’t have a guaranteed right to a set share.
• Flexibility for families and closely held groups: Useful where stakeholders trust the decision-maker and want to respond to changing family or business circumstances over time.
• Risk management: Assets are held by the trustee for beneficiaries. While this can assist with asset protection planning, outcomes depend on the deed, how the trust is run, and a beneficiary’s personal circumstances.
• Tax planning levers (within the rules): Distributions can be resolved in a way that considers beneficiaries’ tax profiles and the deed’s requirements. Specific tax rules apply and professional advice is important.

Advantages

• High distribution flexibility: Useful where income and needs vary year to year.
• Family succession planning: Can be structured to continue across generations with appropriate deed terms and governance.
• Administrative simplicity for small groups: No need to issue or transfer “units” to reflect changes in family circumstances.

Limitations

• Uncertainty for beneficiaries: Beneficiaries generally don’t have fixed rights to income or capital unless the trustee makes them presently entitled under the deed.
• Less attractive to external investors: Investors typically prefer fixed entitlements and clearer exit mechanics.
• Governance reliance: Success depends on a capable trustee acting within powers, with clear records and timely resolutions.

Unit Trusts: How They Work

A unit trust divides the beneficial interest in income and capital into “units,” similar in concept to shares. A unit holder’s entitlement generally aligns with the number (or class) of units they hold. This can make unit trusts appealing for unrelated investors, joint ventures, and property syndicates where clear, fixed proportions are important.

Key Features

• Fixed entitlements by units: The deed sets how income and capital apply to units. If you hold 30% of the units (in a class), you generally have a 30% beneficial interest as defined by the deed.
• Transferability: Units can often be issued, transferred, or redeemed (subject to deed conditions), making it easier to adjust ownership and facilitate exits.
• Investor‑friendly structure: The fixed nature of interests and the ability to document contributions and exits can be more suitable for unrelated co‑investors.

Advantages

• Clear ownership and returns: Easier to align contributions, distributions, and exit value with agreed percentages.
• Scalable: New investors can subscribe for units on agreed terms, subject to deed mechanics and any pre‑emptive rights.
• Suitable for joint ventures: Common in property or project‑based ventures where parties want fixed, documented entitlements.

Limitations

• Less distribution flexibility: Income and capital follow the unit structure and deed rules - this can limit year‑to‑year tax planning flexibility.
• Additional governance: You’ll need processes for unit issues, transfers, redemptions and valuations, all within the deed.
• Potential duty/tax on changes: Transfers or redemptions can have duty or tax consequences. Get tax advice before implementing ownership changes.

How Do Redemptions And Transfers Work?

The trust deed usually sets out when and how units can be redeemed by the trustee or transferred by a unit holder. Typical steps include a notice to redeem, a valuation method (often market value or a deed‑specified formula), payment terms and updating the unit register. Whether a distribution “must be paid” as cash depends on present entitlement, the deed, and resolutions - tax may assess entitlement even if cash isn’t yet paid. Always review the deed carefully and confirm any tax and duty implications before proceeding.

Discretionary Trust vs Unit Trust: Which Structure Fits Your Goals?

Both structures can work well - the better choice depends on who’s investing, how you want profits and capital to be shared, and how you plan to grow or exit.

When A Discretionary Trust Often Fits

• Family‑owned businesses: Where the trustee will exercise judgment annually and beneficiaries accept that distributions aren’t fixed entitlements.
• Flexible family wealth planning: You want the ability to consider personal circumstances each year within the deed rules and relevant tax laws.
• Fewer outside investors: You don’t expect to regularly issue or transfer ownership portions to unrelated parties.

When A Unit Trust Often Fits

• Unrelated investors or joint ventures: Where participants want fixed, documented entitlements and a clear path to exit.
• Project or property syndicates: It’s important to align investment, income and capital returns to unit holdings.
• Capital raising and onboarding new investors: You want an established process for issuing new units and documenting valuations.

Tax And Risk Considerations (In Brief)

• Tax: In both structures, tax generally follows present entitlements or unit entitlements under the deed and relevant tax law. Because trust taxation can be complex (e.g., streaming, capital gains, and anti‑avoidance rules), speak with your tax adviser before deciding on a structure.
• Liability and asset protection: A trust can support risk management, but outcomes depend on the deed, how the trust is run, the trustee’s capacity, and the circumstances of beneficiaries. Many groups use a corporate trustee to separate control from personal assets.
• Future investors: If you may bring in unrelated investors, a unit trust can offer clearer entry/exit mechanics. If not, discretionary flexibility may be more valuable.

Setting Up A Trust In Australia: Steps And Documents

Whichever path you choose, the trust deed is the foundation. It sets the framework for who benefits, how decisions are made, how income and capital can be handled, and what happens if the trustee changes. Because your deed governs everything from distributions to exits, it’s worth treating it like critical infrastructure, not a template afterthought.

1) Choose Your Trustee

You can appoint an individual or a corporate trustee. Many founders opt for a corporate trustee for clearer separation between personal and trust assets and easier succession planning. If you’re going down this route, you’ll need to set up a company and ensure its documents support the trustee role (for example, the board can pass resolutions to implement trust decisions).

2) Draft And Execute Your Trust Deed

The deed should be tailored to the intended use - for example, how units can be issued, transferred or redeemed in a unit trust, or the scope of trustee discretion and distribution mechanics in a discretionary trust. The deed is a legally binding instrument, and understanding what a deed is (and requires) will help you execute it correctly. Incorrect execution can undermine the structure.

3) Meet Core Registration Requirements

Once the deed is executed and settled, apply for the trust’s identifiers (where applicable), open a dedicated bank account and establish your governance records. For an overview of ABN/TFN and related trust requirements in Australia, ensure you have the right tax registrations in place. Register for GST if the trust’s projected turnover meets the threshold.

4) Put Governance And Records In Place

• Resolutions and minutes: Record trustee decisions (e.g., distributions, unit issues/redemptions, appointments).
• Registers: Maintain a unit register for unit trusts, and keep beneficiary records current for discretionary trusts.
• Banking and accounting: Separate trust funds, clear accounting records, and year‑end distribution resolutions are essential.

5) Prepare The Operational Contracts You’ll Need

The trust structure is only part of the picture - if the trust will run a business, have the right contracts and policies in place before you trade. Depending on your model, that could include customer terms, supplier agreements, and workplace documents.

Legal Compliance And Operational Essentials

Trusts that operate businesses must meet the same legal obligations as any other Australian business. A few areas deserve special attention from day one.

Australian Consumer Law (ACL)

If the trust supplies goods or services, its marketing, sales practices, and customer policies must comply with the ACL. Avoid misleading or deceptive conduct and ensure your refund/repair policies reflect your legal obligations - see the principles in section 18 of the ACL for a baseline on conduct.

Privacy And Data

If you collect personal information (for example, through a website or booking system), you’ll likely need a clear, accessible Privacy Policy and practices that align with the Privacy Act and the Australian Privacy Principles. This isn’t just a website footer - it’s how you actually handle data day‑to‑day.

Employment And Contractors

Hiring staff or engaging contractors triggers workplace obligations, including proper contracts, award compliance (if applicable) and fair work standards. Put compliant Employment Contracts in place and ensure your payroll and leave processes match the law. If you work with contractors, use clear contractor agreements and be mindful of sham contracting risks.

Intellectual Property

Decide who owns IP created in the business (the trust vs individuals or suppliers), and document this in your contracts. Protect your brand with trade marks, and address IP clauses in any contractor or supplier agreements to avoid future disputes.

Company Governance (If Using A Corporate Trustee)

Where you’ve appointed a company as trustee, ensure the company’s internal documents support that role. A fit‑for‑purpose Company Constitution and clear director resolutions make it easier to evidence decisions and manage changes in control over time.

Tax And Accounting

Trust taxation has unique rules. Year‑end distribution resolutions, streaming (if permitted by the deed), capital gains and franking credits all need careful handling. Engage your accountant early so your trust deed and your processes line up with how you plan to operate. This article isn’t tax advice - it’s important to get tailored guidance for your situation.

Bringing In, Or Exiting, Investors

Plan unit issues or transfers (for unit trusts) and document valuation mechanics up front. For discretionary trusts, consider whether your structure will ever need to include unrelated beneficiaries - if so, a unit trust or a different ownership vehicle may be more suitable.

Switching Structures Later

It can be possible to restructure (for example, from a discretionary trust to a unit trust), but this can be complex and may trigger duty or tax consequences. If you expect rapid growth, external capital, or frequent ownership changes, factor this into your decision now rather than relying on a future restructure.

Key Takeaways

• A discretionary trust gives the trustee flexibility to resolve who is presently entitled to income and/or capital each year, which can work well for families and closely held businesses.
• A unit trust allocates fixed entitlements by units, making it easier to onboard unrelated investors and document clear ownership, distributions and exits.
• Your trust deed is critical - it sets the rules for distributions, powers, unit issues/transfers (for unit trusts), and succession. Treat it as essential infrastructure, not a template.
• If you’ll operate a business, meet core obligations from day one: ACL compliance, a robust Privacy Policy if you collect customer data, and compliant employment documentation for your team.
• Many groups appoint a corporate trustee for clearer separation and smoother succession. If you go this route, set up the company properly and keep governance records in order.
• Tax outcomes depend on your deed and how you manage distributions and entitlements. Engage an accountant early - getting the structure and processes right upfront can save significant cost later.

If you’d like a consultation on choosing between a discretionary trust and a unit trust - and getting the deed, trustee and business documents set up correctly - you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no‑obligations chat.