If you’re building a business in Australia with co-owners or planning to hold assets for a venture, you’ll likely come across the term “unit trust.”
Unit trusts are common in small business because they can separate asset ownership from day-to-day operations, offer flexibility in how profits are shared, and help manage risk.
But what is a unit trust, how does it work, and is it the right structure for your situation? In this guide, we’ll define a unit trust in plain English, walk through how the structure operates, and outline when small businesses typically use one - plus the legal documents you’ll need to do it properly.
Unit Trust Meaning: The Basics
A unit trust is a type of trust where the beneficial ownership of the trust’s assets is divided into “units.” Think of units like shares: each unit entitles its holder to a proportion of the trust’s income and capital.
In a unit trust:
- The trustee is the legal owner of the trust assets and manages them according to the trust deed.
- Unit holders are entitled to distributions based on how many units they hold.
- The trust deed sets the rules - from how units are issued and transferred to how income is distributed and decisions are made.
Businesses choose unit trusts for a mix of commercial and legal reasons - including flexibility in distributions and potential asset protection compared with holding assets personally. Whether those benefits make sense for you depends on your goals, your risk profile, and your tax position (chat with your accountant and a lawyer together).
How Does A Unit Trust Work In Australia?
At a practical level, a unit trust holds assets (for example, business equipment, intellectual property, or real estate), and the trustee manages those assets for the benefit of the unit holders.
Key Roles
- Trustee: The trustee can be an individual or a company. The trustee controls the trust assets and must act in line with the trust deed and in the best interests of unit holders. Many businesses appoint a corporate trustee to add a layer of separation between the people involved and the assets.
- Unit holders: These are the investors/owners. Their entitlements are fixed by the number of units they hold. If you hold 40% of the units, you’re typically entitled to 40% of the trust’s distributable income (subject to the deed).
- Trust deed: The trust’s rulebook. It sets out how units are issued/redeemed, distribution mechanics, meeting and voting rules, trustee powers, transfer restrictions, and more.
Income, Capital And Distributions
When the trust earns income (for example, rent from assets or licensing revenue), the trustee can distribute that income to unit holders according to the deed and the number of units on issue.
Unit trusts can also return capital (e.g. when an asset is sold) based on unit holdings. The deed usually specifies how these amounts are calculated and paid, and whether the trustee has discretion over timing.
Corporate Trustee Or Individual Trustee?
A corporate trustee is a separate company established to act as trustee. This is common because it can simplify ownership changes (you can change the company’s directors or shareholders without changing the trustee entity) and may assist with liability management. If you don’t already have one, you may need a company set up before you settle the trust.
ABN, TFN And Registrations
Trusts usually need their own TFN for tax and may need an ABN if carrying on an enterprise. Depending on turnover and activities, GST registration may also be required. The basics are covered in this quick guide to trust requirements in Australia.
Unit Trust Structure vs Company Or Partnership: Which Suits Your Business?
There’s no one “best” structure - the right choice depends on your objectives, risk, funding and exit plans. Here’s how a unit trust compares with two common alternatives at a high level.
Unit Trust
- Ownership via units: Easy to express each party’s stake, and to add new investors by issuing units (subject to deed terms).
- Distribution flexibility: Deeds often allow some flexibility in timing and categorisation of distributions.
- Separation of asset ownership: Assets sit with the trustee on trust for unit holders.
- Complexity and compliance: You’ll manage a trust deed, trustee duties, trust tax reporting, and unit registers.
Company
- Separate legal entity: The company owns assets and enters contracts in its own name, which can help limit shareholder liability.
- Simple share/equity mechanics: Shares and a Company Constitution govern ownership and decisions.
- Tax treatment: Companies pay corporate tax; dividends are paid to shareholders (discuss tax with your accountant).
- Often preferred for trading: Many small businesses trade through a company and may use a trust for holding assets.
Partnership
- Co-owners carry on business together: Partners are generally jointly liable for partnership debts.
- Less structural flexibility: Compared with a unit trust’s formal unit system, partnership interests can be harder to adjust.
- Suitable for small, simple ventures: But consider risk and exit planning before committing.
In practice, small businesses often combine structures. For example, a corporate trustee runs a unit trust that owns assets, while a separate trading company operates the business. There are also scenarios where you may be beneficially holding shares in a company through a trust - useful for ownership planning and risk management.
When Should A Small Business Use A Unit Trust?
We see unit trusts commonly used in these scenarios:
- Multiple investors want clear, fixed entitlements: Units neatly represent each party’s stake, distributions and exit value.
- Property and asset holding: A unit trust holds property or equipment, while a separate operator pays rent or licence fees to use the assets.
- Family or friend co-investments: A formal structure with a trust deed and Unitholders Agreement can help prevent disputes.
- IP holding entities: The trust owns the brand or technology and licenses it to an operating company.
- Project-based ventures: Where investors back a specific project with defined economics and a plan to exit.
Is a unit trust always better? Not necessarily. If you want a simple trading structure, a company may be cleaner. If your priority is limited liability for the trading activity itself, a company as the trading entity is common. The right approach often blends structures based on your risks and growth plan.
Setting Up A Unit Trust: Step-By-Step
Here’s a straightforward path to establishing a unit trust for your business.
1) Decide On The Trustee
Choose between an individual trustee or a corporate trustee. Many founders prefer a corporate trustee for flexibility and governance. If you’re using a new company, complete your company set up first.
2) Draft And Execute The Trust Deed
The trust deed defines the structure (units), rights and obligations. It should cover unit issues and transfers, distributions, trustee powers and protections, decision-making, valuation, and dispute processes. Because this is the foundation document, it’s worth getting it drafted properly to fit your business model.
3) Settle The Trust
A settlor (not a unit holder) pays a nominal settlement sum to the trustee to establish the trust. Follow the deed’s execution instructions carefully and keep proper records.
4) Issue Units And Record Ownership
Units are issued to investors and recorded in a unit register. If there are staged investments or future options, make sure the deed allows for it and put side agreements in place as needed.
5) Put A Unitholders Agreement In Place
Alongside the deed, it’s smart to have a Unitholders Agreement that sets expectations around exits, transfer restrictions, decision-making, pre-emptive rights, tag/drag rights, valuation, and dispute resolution. The trust deed states how the trust works; the Unitholders Agreement governs how you work together.
6) Get The Trust’s TFN/ABN And Register For GST If Required
Apply for the TFN and ABN (if the trust carries on an enterprise). Check if GST registration is required based on projected turnover and activities. This aligns with the core trust requirements most setups must address.
7) Open A Bank Account And Set Up Systems
Open a bank account in the trustee’s name “as trustee for” the unit trust. Put accounting and distribution processes in place so you can track income, expenses and distributions accurately.
8) Protect And License Your Assets
If the trust will hold intellectual property, consider registering trade marks and licensing the IP to your operating entity under a written agreement. If the trust will lease assets to another entity, formalise that lease or licence and consider taking security (for example, registering an interest on the PPSR) to protect against non-payment. For a refresher on security interests, see what the PPSR is and why it matters.
9) Plan For Change
Businesses evolve. If you ever need to amend the deed (and the deed permits changes), you’ll use a Deed of Variation. Keep your registers, resolutions and agreements up to date as investors enter or exit.
Key Legal Documents For A Unit Trust
Every unit trust is different, but most will need several foundational documents. The following are common for Australian small businesses.
- Trust Deed: The core instrument that creates the trust and sets the rules for units, distributions, and trustee powers.
- Unitholders Agreement: A contract between unit holders covering governance, decision-making, transfers, valuation and exits. See Unitholders Agreement.
- Corporate Trustee Documents: If using a company as trustee, you’ll need its incorporation documents and a Company Constitution that supports trustee activities.
- Asset Lease Or Licence: Where the trust owns assets and another entity uses them, a written lease or licence sets terms and fees.
- IP Assignment Or Licence: If IP is moving into the trust or being licensed out, capture it in a deed and ongoing licence terms.
- Security Documents: If the trust finances assets or provides credit, you may take security and register it on the PPSR.
- Deed Of Variation: Used to amend the trust deed where permitted. See Deed of Variation.
- Board/Trustee Resolutions: Formal decisions for issuing units, declaring distributions, approving agreements and appointing officers.
- Deeds And Execution: Certain trust documents must be executed as a deed. If you’re unsure, review the basics of what is a deed under Australian law.
Where the trust holds equity in a trading company, you may also need a combined Shareholders-Unitholders Agreement to align governance between trust investors and company shareholders.
Compliance, Taxes And Risk Management
Trusts offer real flexibility, but you’ll need to keep on top of ongoing obligations.
Trustee Duties And Governance
- Act per the deed and law: The trustee must follow the trust deed, act in good faith and in the best interests of unit holders.
- Keep proper records: Maintain the unit register, minutes, resolutions and distribution statements. These are essential for audits and investor confidence.
- Conflicts and decision-making: Your deed and Unitholders Agreement should address conflicts, related party transactions and voting thresholds for major decisions.
Tax And Distributions
- TFN/ABN and lodgements: Ensure the trust has a TFN/ABN and lodges returns as required. Distributions to unit holders should be properly resolved and documented.
- GST: Register if required and issue tax invoices correctly where the trust is carrying on an enterprise.
- State duties/land tax: If the trust holds real property or land-rich assets, consider stamp duty implications on unit transfers and potential land tax surcharges depending on the trust type and beneficiaries.
Tax outcomes vary widely based on your business model and investor profiles, so it’s best to loop in your accountant early.
Contracts And Risk
- External contracts: Put formal contracts in place for leases, licences, services and financing. Don’t rely on handshake arrangements when the trust owns valuable assets.
- Security and enforcement: Where the trust leases or finances assets, consider taking security and registering on the PPSR to improve your position if a counterparty defaults.
- Insurance: Ensure appropriate insurance covers the trust’s assets and activities (and, where relevant, the operating entity).
Changing Owners Or Exiting
Plan for how units can be transferred or redeemed. Your Unitholders Agreement should set pre-emptive rights, valuation methods and exit mechanisms. If the structure needs to evolve as you grow, your team may consider moving assets or beneficially holding shares through the trust in a trading company - always check the deed and tax consequences before making changes.
Key Takeaways
- A unit trust is a trust where ownership is divided into units, giving each unit holder a fixed entitlement to income and capital under the trust deed.
- Small businesses often use unit trusts to separate asset ownership, bring in multiple investors and manage distributions with clarity and flexibility.
- The structure turns on three pillars: a suitable trustee (often a corporate trustee), a robust trust deed, and clear investor arrangements via a Unitholders Agreement.
- Setting up correctly involves drafting and executing the deed, issuing units, getting TFN/ABN, and putting bank accounts, contracts and compliance processes in place.
- Ongoing success depends on strong records, proper distributions, tax and state duty awareness, and risk controls like leases, licences and PPSR security.
- If your situation changes, you may be able to adjust the deed via a Deed of Variation and align governance with a Shareholders-Unitholders Agreement where the trust holds company equity.
If you’d like a consultation on setting up or reviewing a unit trust for your business, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.
