What is a Unit Trust?
A unit trust is as 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 (or unit holder) 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 rights 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 may have a proprietary interest in that property, generally being a relevant proportion of all the property of the unit trust, although this will depend on the terms of the trust deed. Refer to Charies V FCT (1954) 90 CLR 598 and CPT Custodian Pty Ltd v Commissioner of State Revenue (2005) HCA 53. However, for CGT purposes, a unit is a CGT asset so that when a unit is sold it is the unit that is the relevant CGT asset, rather than any interest the unitholder might have in the underlying property of the unit trust. Refer TD 2000/32.
- 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
- 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