What is a Unit Trust?
A Unit Trust is similar to a Family Trust but is used - you guessed it - for businesses
rather than a family. The Unit Trust is simply the extension of a Family Trust into
the field of commerce.
One or two people, usually a husband and wife, control a Family Trust. The husband
and wife have complete discretion to whom they distribute income each financial
year. Such "trust" is not usually shared outside a family! Hence the
need for a Unit Trust. (For more information on Family Trusts please phone for a
copy of Family Trusts - Uses and Abuses.)
How does a Unit Trust work?
At the end of each year, income is distributed to the Unit Holders in proportion
to the units that beneficiary holds. The Trustee has no discretion.
Units may be held by Family Trusts, companies or by individuals.
Can’t I just use my Family Trust to do all this?
A Unit Trust serves a different purpose to a discretionary Family Trust. A Unit
- negotiability (you can buy and sell units)
- fixed annual entitlements to income and capital (the trustee can not reduce your
A Unit Trust can have discretionary units. However the discretion is restricted
to income (not capital). A Unit Trust should generally not be used as a substitute
for a Family Trust. Rather it may be prudent to have your Family Trust owning the
units in the Unit Trust.
What happens if the Unit Trust goes broke?
Unfortunately unit holders can be liable to pay any shortfall of assets on the Unit
Trust going broke. This is the case especially if the trust is not properly drafted
and maintained by your professional advisers.
In Broomhead Pty Ltd (in Liquidation) v Broomhead Pty Ltd Justice McGarvie stated
that the unit holders in a Unit Trust were liable to indemnify the trustee against
liabilities incurred in carrying on a business. In this case the share of each beneficiary’s
liability was limited to the proportion of his or her beneficial interest.
Cashing in and transferring of units
The ownership of the trust funds is divided into a number of equal units. The units
are recorded on a register and are transferable like shares in company.
Well constructed Unit Trusts include mechanisms for cashing in (redemption) and
transferring the units. Of particular importance is the procedure for determining
the price at which units are to be redeemed.
Units in the Unit Trust can be readily traded and people holding them can participate
in the profits of the business on a set percentage.
Unit Trust versus the company
On the face of it, owning units in a Unit Trust is similar to owning shares in a
company. The High Court of Australia has, however, stated that a unit in a Unit
Trust is fundamentally different to a share in a company. A share holder has no
interest in the assets of the company. A Unit Holder has a proprietary interest
in all the trust property: Charles v Federal Commissioner of Taxation (1954) 90
A unit holder can therefore lodge a caveat over land held in the Unit Trust. A shareholder
in a company has no such right.
Other differences are:
- A trust comes into existence as the result of a private rather than a government
Act. There is less governmental regulation of trusts.
- A company is a legal entity in itself. A trust is not a separate legal person and
offers more flexibility.
- In a Unit Trust the trustee holds property, such as shares in a company, on trust
for the Unit Holders. The Unit Holders are regarded, like beneficiaries under a
trust, as equitable owners of the investments held by the trustees.
- A company is linked together by a contract in the company’s Memorandum and Articles.
On the other hand, investors in a Unit Trust are not necessarily in any contractual
relationship with each other. There is more flexibility in a Unit Trust.
- Although a trust is not a corporation or company, a person connected with a trust
may be a company.
- You can sell both shares in a company and units in a Unit Trust. You can draft your
Unit Trust so that you have to offer your units to other unit holders before you
sell them on the open market. Shareholders in a company can enter into similar restrictions
through a shareholders’ deed.
How do I get myself a Unit Trust?
If you require further assistance, please phone us to arrange an appointment. Your
professional adviser may also wish to attend. A one hour consultation costs $440.
Get one off the