Discretionary Vs Unit Trust: Which Is Right For Your Business?

Choosing the right structure for your small business can make a huge difference to your tax efficiency, asset protection and how easily you can bring in co-founders or investors.

For many Australian businesses, a trust is a popular option. But when people say “use a trust,” they usually mean one of two very different structures: a discretionary trust (often called a family trust) or a unit trust.

In this guide, we’ll break down discretionary vs unit trust in plain English. You’ll see how each one works, the key differences, when each is typically used, and the practical legal steps to set yours up the right way in Australia.

What Is A Trust Structure For Business?

A trust is a legal relationship where a trustee holds and manages assets for the benefit of beneficiaries, according to a trust deed. In a business context, the trust usually operates the business (or holds business assets like shares or IP), and the trustee runs things on behalf of beneficiaries.

There are two common types of trading trusts in Australia:

• Discretionary trust (commonly a “family trust”)
• Unit trust

Both can help with risk management and tax flexibility, but they work differently. If you’re new to trusts, it’s helpful to understand how trusts in Australia support asset protection and business planning at a high level before you decide which type suits your goals.

Discretionary Vs Unit Trust: What’s The Difference?

Discretionary Trust (Family Trust) - Flexibility Over Distributions

In a discretionary trust, the trustee has discretion each year to decide which beneficiaries receive income and capital, and in what proportions (subject to the trust deed). This flexibility is often attractive for family-run businesses.

Key characteristics:

• Distributions are at the trustee’s discretion (not fixed by ownership units).
• Commonly used for family businesses and asset-holding structures.
• Can provide tax planning flexibility for eligible beneficiaries (get tax advice for your specific situation).
• Usually better for closely held ownership where decisions are made within a family or tight-knit group.

Unit Trust - Fixed, “Share-Like” Interests

In a unit trust, beneficiaries hold units (similar to shares in a company). Income and capital are generally distributed to unitholders in proportion to the units they own.

Key characteristics:

• Entitlements are usually fixed based on the number of units held.
• Often used when unrelated parties co-own a business and want clear, proportional rights.
• Easier to price, buy, sell or transfer interests via units.
• Helpful where investors expect transparent, formula-based returns.

Governance & Control

• Discretionary trusts concentrate decision-making with the trustee, which can streamline family decision-making but may not suit unrelated co-owners.
• Unit trusts tend to rely on the trust deed and a unitholders arrangement for governance, which provides a more “arms-length” framework for investor-style relationships.

When Each Trust Typically Works Best

• Choose a discretionary trust if your business is family-run, you value distribution flexibility, and ownership will likely remain within that family group.
• Choose a unit trust if you have unrelated partners, you anticipate changing ownership stakes over time, or you want an investment-style structure where contributions and distributions are proportionate.

If your trust holds company shares (for example, a trust as the shareholder in your operating company), it’s worth reading about holding shares through a trust to understand how beneficial ownership works in practice.

Which Structure Suits Your Small Business?

There’s no one-size-fits-all answer. The “right” trust depends on who owns the business, how profits will be shared, and your long-term plans. Ask yourself:

1) Who Are The Owners And How Aligned Are Their Interests?

• If owners are family members and profit needs may change year to year, a discretionary trust’s flexibility can be helpful.
• If owners are unrelated or contributing different capital amounts, a unit trust can clearly reflect each person’s stake.

2) How Do You Want To Handle Profit Distributions?

• Discretionary: trustee chooses beneficiaries and amounts each year (within rules in the deed).
• Unit: profits flow in line with units held-clear and predictable, which investors often prefer.

3) Do You Expect New Partners Or Investors?

• Unit trusts can make it simpler to bring in a new unitholder by issuing or transferring units at an agreed price.
• Discretionary trusts can add or remove beneficiaries subject to the deed, but don’t easily price “interests” in the same way as units.

4) What Are Your Exit Options?

• Unit trusts generally offer clearer exit pathways since units can be sold or redeemed under the deed terms.
• Discretionary trusts often rely on more bespoke deed provisions to manage exits and succession planning.

Remember, trusts don’t exist in a vacuum. Many small businesses use a corporate trustee (a company acting as trustee). If you go down that path, you’ll also be dealing with company law matters (directors, shareholders, constitutions) alongside your trust deed.

How Do You Set Up A Trust In Australia?

The trust deed is the foundation of your structure. It sets out what the trustee can do, who the beneficiaries are, how distributions work and how new parties can come in or out. A well-drafted deed is essential for both discretionary and unit trusts.

Typical Setup Steps

1. Choose the trustee: You can appoint an individual or a company as trustee. Many businesses prefer a corporate trustee for risk management and admin clarity. If you choose a company, consider your Company Set Up first, then appoint it as trustee.
2. Draft and execute the trust deed: Make sure the deed suits a discretionary or unit trust (as chosen), and covers powers, distributions, decision-making, adding/removing beneficiaries or unitholders, and dispute mechanisms.
3. Initial settlement: A nominal amount is transferred to establish the trust (often by a settlor who is not a beneficiary). The process must follow the deed’s requirements.
4. Apply for ABN/TFN and register for GST if required: The trust will typically need its own Tax File Number and Australian Business Number. Our overview on trust requirements explains how ABN, TFN and (if applicable) ACN fit together.
5. Open bank accounts and set up accounting: Open separate accounts in the name of the trustee “as trustee for” the trust and put proper bookkeeping in place to track income and distributions.
6. Review insurance and risk controls: Trusts are part of your risk strategy, but so are contracts, policies and appropriate insurance.

Corporate Trustee? Don’t Forget The Company Basics

If you use a company as trustee, you’ll also need the standard company governance documents and decisions in place, such as a Company Constitution. Where there is more than one shareholder in the corporate trustee, it’s wise to put a Shareholders Agreement in place to deal with decision-making, exits and dispute resolution between owners of the trustee company itself.

What Legal And Compliance Issues Do You Need To Get Right?

Trusts are powerful, but they also require ongoing care. Here are key areas to manage well from day one.

Trustee Duties And Decision-Making

• The trustee must act in the best interests of beneficiaries and in line with the deed.
• In a discretionary trust, trustee resolutions for yearly distributions should be made properly and on time.
• In a unit trust, respect the proportional entitlements set by units-any departures must be permitted by the deed and the parties.

Record-Keeping And Resolutions

• Maintain minutes, trustee resolutions and distribution records each year.
• Keep clean books separating trust assets and liabilities from personal or other entities’ affairs.

Company Compliance (If You Have A Corporate Trustee)

• Meet ASIC obligations for the trustee company (e.g. annual reviews, updates to company details).
• Directors should be aware of their duties under the Corporations Act.

Tax And Distributions

• How the trust is taxed depends on distributions and other factors. Get tax advice tailored to your situation-especially for family trust elections, streaming rules and unit pricing.
• Register for GST if your turnover meets the threshold and manage BAS and PAYG filings where relevant.

Trading Compliance (If The Trust Operates The Business)

• Consumer law: If you sell goods or services, comply with the Australian Consumer Law on fair advertising, refunds and guarantees.
• Privacy: If you collect personal information online or offline, your business should publish a Privacy Policy and comply with the Privacy Act.
• Employment: If you hire staff, use compliant contracts and follow Fair Work obligations on pay, leave and safety.
• Licences and permits: Industry-specific licences (e.g. food, health, building) still apply to a trust-operated business.

A trust helps organise ownership and asset protection, but day-to-day compliance still applies to the trading entity-whether that’s the trustee “as trustee for” the trust or a separate operating company owned by the trust.

Essential Documents Your Trust-Operated Business Will Likely Need

Your trust deed is not the only document you’ll rely on. To run a professional, low-risk operation, most small businesses also put these essentials in place.

• Trust Deed: The core governing document setting out the trustee’s powers, who benefits and how money and capital move.
• Trustee Resolutions: Formal decisions (e.g. annual distribution resolutions) made in line with the deed.
• Company Constitution: If you use a corporate trustee, a robust Company Constitution supports clean governance.
• Shareholders Agreement: If the trustee is a company with multiple owners, a Shareholders Agreement sets expectations for decisions, exits and disputes.
• Customer Terms: Clear, tailored terms for your goods or services (including warranty, delivery, payment and liability clauses).
• Supplier or Contractor Agreements: Contracts with manufacturers, wholesalers, independent contractors or service providers to lock in scope, pricing, IP and confidentiality.
• Employment Contract: Compliant contracts and policies if you employ staff (covering duties, confidentiality, leave, and termination).
• Privacy Policy: If you collect customer data, your Privacy Policy explains what you collect and how you use it.
• IP Protection: Consider registering your brand as a trade mark and documenting IP ownership between the trust, trustee company and any operating entities.

If your trust is being used to hold shares or IP in an operating company, also think about broader structuring tools like asset protection and ring-fencing risks between entities. Where the trust owns company shares, make sure who “beneficially owns” those shares is clear and consistent with your deed and any corporate records related to beneficial ownership.

Practical Tips To Avoid Common Mistakes

Don’t Reuse A Generic Deed

Your deed drives everything. A generic deed might not allow the distributions, unit issuance/redemption or succession mechanics you’ll need. It’s harder (and riskier) to fix later.

Clarify Roles Across Entities

If you have a corporate trustee and a separate trading company owned by the trust, document who does what. Keep minutes and decisions clear so tax, accounting and legal teams can stay aligned.

Plan For Changes Early

Will you admit new investors, buy a partner out, or pass interests to the next generation? It’s easier if the deed, any unit holder arrangements and company documents (like your Company Constitution) support those pathways from day one.

Think Through Downstream Documents

Even with the right trust structure, you still need strong trading documents-customer terms, supplier contracts, employment agreements and a visible Privacy Policy if you collect personal information.

Be Realistic About Administration

Trusts give you flexibility, but they need discipline: on-time resolutions, separate accounts, and tidy records. Build these habits early to avoid headaches at tax time or during due diligence if you ever sell.

Key Takeaways

• A discretionary trust gives the trustee flexibility to distribute income and capital among beneficiaries, which often suits family-run businesses.
• A unit trust offers fixed, unit-based entitlements that can be easier for unrelated partners and investors to manage and value over time.
• Think about owners, distributions, new investors and exit plans before choosing discretionary vs unit trust-your goals should drive the structure.
• Set up the basics properly: a tailored deed, the right trustee (often a company), ABN/TFN registrations, and clean banking and records.
• If you use a corporate trustee, support it with company governance like a Company Constitution and, where there are multiple owners, a Shareholders Agreement.
• Running the business through a trust still requires everyday compliance with consumer, privacy and employment laws, plus clear contracts and policies.

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