Written by:
Joel Simmonds
Head of Advice
A unit trust is a type of investment structure where funds are pooled together from various investors to invest in assets such as property, shares, or other securities.
Unlike a discretionary trust, where the trustee has discretion in distributing income, a unit trust distributes income and capital based on the number of units each investor holds. This structure makes unit trusts more transparent and predictable, allowing each investor to receive their share of profits relative to their investment.
In Australia, unit trusts are widely used for investment purposes, as they provide a way for individuals and companies to pool their resources and invest in larger or more diversified portfolios than they might manage individually.
Key characteristics of unit trusts include:
This structure is commonly used in property investments, mutual funds, and other pooled investment vehicles.
People set up unit trusts for a variety of reasons, including:
When considering whether a unit trust is the right investment structure for you, it’s important to weigh the pros and cons:
In Australia, unit trusts are often used for managing investments in property, shares, or other financial assets.
The trust itself is governed by a trust deed, which sets out the rules for managing the trust and distributing income.
Investors purchase units in the trust, and their ownership of the trust is proportional to the number of units they hold. This makes unit trusts an attractive option for those looking to invest in larger-scale ventures but who may not have the capital to do so individually.
Unit trusts in Australia are also frequently used by self-managed super funds (SMSFs), providing a way for trustees to diversify their retirement investments.
The taxation of unit trusts in Australia depends on the income generated by the trust and the structure of the trust itself.
Generally, unit trusts are not taxed at the trust level. Instead, income is distributed to the unitholders, who are then responsible for paying tax on their share of the trust’s earnings.
Key points include:
There are several types of trusts used for investment purposes in Australia, and it’s important to understand how unit trusts compare to other options, such as discretionary trusts or family trusts.
Setting up a unit trust in Australia involves several steps:
A unit trust can be an effective way to pool resources and invest in larger, more diverse assets than you might be able to manage on your own.
Whether you’re considering a unit trust for property investment, as part of an SMSF strategy, or simply to diversify your portfolio, it’s important to understand the pros and cons, how the trust operates, and the tax implications.
If you’re unsure whether a unit trust is right for you or need assistance in setting one up, it’s always a good idea to seek professional financial advice to ensure you’re making the best decision for your financial future.
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Here’s some of the most commonly asked questions about discretionary trusts.
If your question isn’t answered below, please feel free to get in touch. We’re always happy to help.
The key difference lies in how profits are distributed. In a unit trust, distributions are based on the number of units each investor holds.
In contrast, a discretionary trust allows the trustee to decide how the income or profits are distributed, giving them greater flexibility.
A fixed unit trust operates similarly to a traditional unit trust, but the distributions to unit holders are fixed and predetermined.
This type of structure is often preferred for those who want a more predictable return, as profits are divided in a set way based on the units held.
A cash management unit trust primarily invests in cash-based securities such as term deposits, government bonds, and other short-term interest-bearing investments.
This is often a lower-risk option for investors seeking a stable return while maintaining liquidity.
Yes, a unit trust can borrow money to fund its investments. This is often referred to as a geared unit trust, where borrowing is used to leverage the investments within the trust. However, this increases the risk, as any losses are also magnified.
Yes, property unit trusts are a popular option in Australia. These trusts pool funds to invest in various types of property, including residential, commercial, and industrial properties.
Unit holders receive returns based on the rental income and capital growth of the properties owned by the trust.
Yes, a self-managed super fund (SMSF) can invest in unit trusts, including geared unit trusts and related unit trusts. However, there are strict rules and regulations set by the Australian Taxation Office (ATO) that govern these investments.
Always seek professional advice before including unit trusts in your SMSF portfolio.
The taxation of unit trusts depends on how the trust is structured and the income it generates. In general, the income distributed to unit holders is taxed at the individual’s marginal tax rate. Capital gains tax (CGT) may also apply when units are sold at a profit.
The trustee of a unit trust is responsible for managing the trust’s assets, making investment decisions, and ensuring the trust operates according to the terms set out in the unit trust deed. The trustee acts in the best interests of the unit holders and is legally obligated to act within the law and the trust’s guidelines.
Setting up a unit trust involves the following steps:
Yes, some unit trusts, especially those that invest in dividend-yielding assets, may pay distributions to unit holders that are similar to dividends. These distributions can come from interest, rent, dividends from shares, or capital gains.
Both unit trusts and exchange-traded funds (ETFs) allow for pooled investments, but there are key differences. Unit trusts are typically managed by a trustee and can be more flexible with their asset choices, whereas ETFs are traded on the stock exchange and offer greater liquidity, making them easier to buy and sell.
A company is a separate legal entity that can own assets, earn income, and be taxed independently of its shareholders. A unit trust, on the other hand, is not a separate legal entity, and income is passed through to unit holders, who are taxed at their individual rates.
Companies offer more flexibility with reinvesting profits, while unit trusts provide better transparency in terms of income distribution.
The fees for managing a unit trust can include:
There are various types of unit trusts, including:
Each type of trust caters to different investment needs, from conservative cash-based trusts to more aggressive property or geared trusts.
Yes, it is possible to convert a unit trust into a discretionary trust if the terms of the trust deed allow for it.
This process can be complex and may have tax implications, so it’s essential to consult with a legal or financial advisor before making any changes.
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This is a publication of Direct Wealth Pty Ltd, a wholly owned subsidiary of Direct Wealth Group Pty Ltd.
General Advice Warning – The information contained in this article is of a general nature and does not take into account your particular objectives, financial situation or needs. You should therefore consider the appropriateness of the advice for your situation before acting on it. You should obtain and consider the relevant Product Disclosure Statement (PDS) and seek the assistance of an authorised financial adviser before making any decisions regarding any products or strategies mentioned in this publication.
Disclaimer – While all care has been taken in the preparation of this blog, to the maximum extent permitted by law, no warranty is given in respect of the information provided and accordingly, neither Direct Wealth nor its related bodies corporate, employees or agents shall be liable for any loss suffered arising from reliance on this information.
