Unit Trusts

What is a Unit Trust used for?

A unit trust is similar to a company, in that the unit holders (like shareholders) have a fixed interest in the capital and income of the trust. Just as shares are issued to shareholders in exchange for an appropriate sum of money, units are issued to unit holders. Some other features of note include:

  • unit trusts may confer some taxation benefits not available through a company structure
  • compliance of a unit trust is lower than that for a company
  • a standard unit trust has only one class of units

Unit trusts do not confer asset protection (unless a unit holder is a discretionary trust).

There are three types of standard unit trusts:

  • Standard (or non-fixed), which is the most commonly used type. In this type, the trustee has some liberty as to the method of determining the value of units when required to issue or redeem them.
  • Fixed, which allows the trust to carry forward tax losses to be offset against future profits provided:
    • the trustee has no discretion as to the method of determining the value of units when required
    • unitholders have a vested and indefeasible interest in all the income or capital of the trust
    • the 50% stake test is met
  • Regulation 13.22C, which is suitable when a self-managed superannuation fund wishes to invest, either alone or with other parties, in a unit trust to acquire investments. The self-managed superannuation fund may use its own funds or may borrow under a limited recourse borrowing arrangement to acquire the units. The unit trust is subject to certain restrictions including a prohibition on borrowing or charging its assets, as well as several other restrictions.

What’s required?

There are two parties who must be identified when preparing the documentation for a unit trust. Both of these parties must be legal entities. A legal entity may be one or more individuals, a company or an incorporated association. The individuals must be over the age of 18 years, not bankrupt nor subject to any other legal or mental disability.

  • The trustee, whose role is to:
    • hold the assets of the trust in its name
    • administer the trust, investing the trust funds and keeping its records
    • distribute trust income and capital to the unit holders
  • The unit holders – the unit holders generally have the right to remove and appoint the trustee and whose consent is a necessary pre-requisite to any changes to be made to the trust deed.

We also need to know how many units each unit holder will acquire and the funds paid for each unit.

The trust deed sets out the terms of the relationship between the trustee and the unit holders. It can be used to dictate a variety of procedures or mechanisms in terms of the discharge of the trustee’s duty to the unit holders.


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