Business structures
Unit trust
A unit trust is a trust in which beneficiaries hold fixed units, like shares, and are entitled to income and capital in proportion to the number of units they own.
A unit trust is a type of trust where the beneficial interests are divided into units, and each unit holder is entitled to income and capital in proportion to their holding. It looks a lot like a company with shareholders, but legally it is a trust, run by a trustee under a trust deed. The trustee can be a person or a company, and the unit holders may be individuals, companies or other trusts.
Unit trusts are used for joint investments and business ventures between unrelated parties, because the fixed entitlements make it clear who gets what. A group of investors may hold units in a property trust, or two business owners may hold equal units in a trading trust. In contrast to a discretionary trust, the trustee does not decide year by year who receives income. The entitlement flows according to the units held.
For income tax, the trust lodges a trust tax return, and the net income is generally taxed in the hands of the unit holders according to their entitlement. If the trust makes a loss, it generally stays in the trust and is not distributed to unit holders, although it may be carried forward under the trust loss rules. Units can be bought, sold or redeemed under the deed, and these dealings can have CGT consequences for the unit holder, and for the trust, so it is important to keep good records.
The trustee registers the trust for GST in its capacity as trustee, once GST turnover reaches $75,000 or earlier if it chooses. The trust then charges GST on taxable supplies, claims credits and lodges BAS. Where the unit trust invests in residential rental property, rent is an input-taxed supply, which means no GST is charged and no credits can be claimed for related purchases. Mixed activities need careful apportionment of credits.
Unit trusts that employ staff must meet the usual employer obligations, such as withholding and super. State obligations, including stamp duty on transfers of units in some cases and land tax where the trust owns land, are administered by state and territory revenue offices and differ between jurisdictions.
A common misunderstanding is that a unit trust is the same as a company. It is not. The trustee is the legal owner and signs contracts, and the unit holders do not have limited liability in the way shareholders do, unless the trustee is a company and the deed limits recourse. Another is neglecting the deed. Dealing with units or income in ways the deed does not allow can cause legal and tax problems.
This is general information only, so confirm the details with the ATO or a registered tax professional.
Worked example
Three investors hold 1,000 units each in a unit trust that owns a commercial building. The trust has net income of $90,000 for the year. Each unit holder has one third of the 3,000 units, so each has an entitlement of $90,000 x 1/3 = $30,000, which they include in their own tax return. The trustee collects rent plus GST on the commercial lease and lodges BAS.
Practical tips
- Keep a register of unit holders and update it for every issue, sale or redemption, as it governs who is taxed on what.
- Check how the trust deed handles losses, because losses generally stay in the trust rather than flowing to unit holders.
- Get advice on GST when the trust holds a mix of residential and commercial property, as credits may only be partly claimable.