Different Business Structures: Part 4: Unit Trust

Written by Gavin Bateman | Oct 23, 2009 4:11:15 AM

A unit trust is a trust in which the trust property is divided into a number of defined shares called units. The beneficiaries subscribe for the units in much the same way as shareholders in a company subscribe for shares.

In an ordinary unit trust a beneficiary is entitled to the income and capital of the trust in proportion to the number of units held.

Like a company, it is possible for a unit trust to have different types of units with different right attached.

Unlike a beneficiary of a discretionary trust, who has no proprietary interest in the property of the discretionary trust, a unit holder in a unit trust has a proprietary interest in all the property of the unit trust.

The advantages and disadvantages of a unit trusts are as follows:

Advantages of Unit Trusts

Easy to introduce new equity partners – no value shifting rules
Less regulations than a company
When non-related parties are in trust together interests are fixed
50% discount method for work out CGT is available
The small business concessions can be accessed.
Simple to wind up
Asset protection available through correctly drafted trust deed
No regulator
Substantiation rules less onerous than those imposed on individuals

Disadvantages of Unit Trusts

Flow through of small business concessions reduced by cost base adjustments
If trust is funded by debt rather than equity, disposal of units can lead to large capital gains
A change in unit holding can make pre-CGT assets to post-CGT assets
May not be able to elect to be a family trust
Losses are trapped in the structure
The complex trust loss provisions apply
Cannot transfer losses to other controlled entities like companies
Clients can have trouble understanding all terms of deed
More costly than sole trader and/or company
Beneficiaries can be subject to complex PAYG calculations
Varying the terms or objects of the trust can amount to a resettlement and have CGT and stamp duty consequences