Unit Trusts in Australia: An Essential Guide for Business Owners

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If you’re exploring business structures and wondering whether a unit trust is right for you, you’re not alone. Many Australian business owners compare the benefits of a unit trust with alternative structures – especially companies – to determine which best suits their needs. In this guide, we walk you through the inner workings of a unit trust, its key advantages and disadvantages, and the regulatory landscape in Australia so you can make an informed decision.

What Is a Unit Trust?

A unit trust is a popular investment and business structure in Australia that allows investors to pool their funds through a trust deed. Unlike companies, a unit trust isn’t a separate legal entity on its own; it operates via a trustee – either an individual or a corporate trustee – which holds the assets on behalf of the unitholders. Essentially, the unitholders gain beneficial interest in the trust’s assets in proportion to the number of units they hold.

This structure is particularly attractive for investors aiming for diversification and for those who prefer a more flexible management arrangement. Because the trust deed governs its operation, adjustments can be more readily made than under the stringent requirements imposed on companies by regulatory bodies such as the Australian Securities and Investments Commission (ASIC).

Comparing Unit Trusts and Companies

When evaluating business structures, it’s essential to understand the nuances that set unit trusts apart from companies. Below, we outline the key differences across several critical areas:

Legal Entity Status

A company is recognised as a separate legal entity created under the Corporations Act 2001. This means it has a distinct legal personality, enabling it to enter into contracts, hold assets, and incur liabilities independently of its shareholders and directors. In contrast, a unit trust exists through a private agreement detailed in its trust deed, with the trustee managing assets on behalf of its unitholders. While this arrangement provides flexibility, it also means that a unit trust does not enjoy the same perpetual existence as a company.

Liability Protection

One of the primary benefits of operating a company is the limited liability protection it affords its shareholders and directors. In most cases, this structure protects personal assets from being affected by the company’s debts. With a unit trust, however, the liability rests largely with the trustee. If the trustee is an individual, there is a potential for personal liability unless a corporate trustee is used. Employing a corporate trustee can help safeguard personal assets by limiting liability to that company’s assets.

Taxation

Taxation is another key differentiator between a unit trust and a company. Companies pay tax at the corporate rate on their profits, and any dividends paid to shareholders may be subject to further personal tax liabilities. On the other hand, unit trusts do not pay tax at the trust level. Instead, income is distributed to unitholders, who then report it on their personal tax returns. For many investors, this flow‐through mechanism can be more tax efficient, particularly when combined with concessions like the 50% capital gains tax discount available for trusts when assets are held for over a year.

For more detailed information on taxation matters, you might also want to consult resources on the Australian Taxation Office (ATO) website.

Regulation and Flexibility

Companies are regulated by stringent statutory requirements under the Corporations Act, meaning there are significant compliance, reporting, and governance obligations. Unit trusts, governed primarily by their trust deed, are subject to fewer regulatory constraints. This grants them a degree of flexibility that can be advantageous in managing operations or making structural changes, though it also requires that unitholders pay close attention to the terms of the trust deed.

Duration and Asset Distribution

Companies typically have a perpetual lifespan, enduring beyond the lives of their shareholders or directors. In contrast, unit trusts usually have a finite duration – often up to 80 years (with some variations by state, such as in South Australia). Furthermore, companies have the ability to retain earnings or distribute them as dividends, while unit trusts must distribute all income annually to unitholders in accordance with their unit holdings.

Capital Gains Tax Advantages

Unit trusts can offer an attractive capital gains tax advantage. When assets are held for more than 12 months, trusts may be eligible for a 50% CGT discount. This can be a significant benefit compared to companies, which may not always be able to pass on such concessions directly to their investors.

Advantages of Investing in a Unit Trust

There are several inherent advantages to investing in or operating your business through a unit trust, including:

Diversification: A unit trust allows the pooling of funds that can be invested across a diversified portfolio, including shares, bonds, and real estate, thereby spreading investment risk.
Professional Management: Investments are typically managed by experienced fund managers, enhancing the potential for achieving the trust’s investment objectives.
Flexibility: The structure of a unit trust is inherently flexible. Investors can buy or sell units relatively easily, offering liquidity and allowing portfolios to be adjusted in response to market changes.
Economies of Scale: Pooling resources with other investors can open the door to larger, otherwise inaccessible, investment opportunities.

Disadvantages and Considerations

Despite their benefits, unit trusts also come with certain disadvantages and risks that should be carefully considered before deciding to invest:

Risk of Loss: Like any investment, unit trusts carry inherent market risks. The value of units can decrease, leading to potential losses.
Fees and Charges: Management fees and other associated costs can erode returns over time.
Lack of Direct Control: Investors in a unit trust have limited influence over the specific investment decisions, meaning you rely on the expertise and strategy of the fund managers.
Market Volatility: Fluctuations in the market can result in unpredictable returns, making it important to assess your risk tolerance.
Trustee Liability: Unless a corporate trustee is utilised, the trustee may face personal liability in the event of adverse outcomes or legal disputes.

Regulatory and Legal Considerations

Operating a unit trust in Australia requires an understanding of the relevant legal and regulatory frameworks. Although unit trusts are generally less regulated than companies, there are still several key aspects to consider:

Trust Deed Provisions: The trust deed is the governing document of the unit trust. It outlines the rights and obligations of all parties and specifies how income is distributed among unitholders. It is crucial to ensure that the deed is drafted to protect the interests of all investors.
Compliance Requirements: While not as rigorous as those for companies, unit trusts must still comply with tax obligations administered by the ATO and follow the guidelines set out in the trust deed.
Investor Disclosure: Full disclosure to potential investors is vital. This includes clear communication regarding fees, risks, and the investment strategy employed by the trust.
Asset Management: The flexibility of the unit trust structure means that it can be adapted relatively quickly. However, investor confidence relies on maintaining robust management and transparent processes.

For more detailed guidance on legal documents and best practices, you may wish to explore articles that discuss the essentials of drafting contracts.

Unit Trusts in Investment Portfolios

From an investment perspective, unit trusts can play a pivotal role in achieving portfolio diversification. They enable you to invest in a range of asset classes without the need to purchase individual assets directly. This means that even if you have a modest amount to invest, you can still benefit from professional asset management and diversified risk.

The ability to convert your investment into units – and vice versa – makes unit trusts a liquid investment option. If circumstances change, you can readily access your capital rather than being locked into a long-term commitment. This flexibility is particularly important in the dynamic environment of today’s financial markets.

Is a Unit Trust Right for Your Business?

Deciding whether to establish your business in unit trust form or to choose an alternative structure such as a company depends on your specific business goals and risk tolerance. For example, if liability protection is a primary concern, incorporating as a company might be a more attractive option given the limited liability afforded to its shareholders. This is well covered in our discussion on the differences between sole trader versus company structures.

On the other hand, if tax transparency and flexibility in income distribution are more important for your investment strategy, a unit trust could provide distinct advantages. Additionally, the simplicity of income flows through the trust, as opposed to the layered taxation on company dividends, may be preferable depending on your financial circumstances.

When weighing these factors, it’s also wise to consider how the structure aligns with your long-term business plans. For smaller operations or for investors seeking less regulated avenues, a unit trust can be a progressive choice. However, if you require a stable legal identity, a perpetual existence, and stronger protections against personal liability, you might want to explore corporate structures further – particularly considering issues around business registration and compliance.

It can also be beneficial to seek expert advice, particularly when you are uncertain about the level of risk you are comfortable taking. For many small business owners, advice on whether to operate as a unit trust, a sole trader, or a company will also touch on broader issues such as the implications for intellectual property. Protecting your brand is essential – for instance, you may wish to consider how best to secure your trade mark as part of your overall strategy.

Key Takeaways

A unit trust is a flexible structure that allows investment pooling via a trust deed managed by a trustee.
Unlike companies, unit trusts do not have a separate legal entity status and mandate the distribution of all income to unitholders annually.
Companies offer limited liability protection, whereas the trustee in a unit trust may face personal liability unless a corporate trustee is used.
Taxation differs significantly: companies are taxed at the corporate rate while a unit trust passes income directly to its unitholders, potentially providing tax efficiencies.
Unit trusts can offer advantages such as diversification, professional management, flexibility, and potential capital gains tax savings, though they also come with risks like market volatility and fees.
Making the right decision depends on your business goals, risk tolerance, and future plans – making it imperative to consider comprehensive advice and proper documentation.

If you would like a consultation on unit trusts, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.

Alex Solo

Alex is Sprintlaw’s co-founder and principal lawyer. Alex previously worked at a top-tier firm as a lawyer specialising in technology and media contracts, and founded a digital agency which he sold in 2015.

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