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 Trust has:

  • negotiability (you can buy and sell units)
  • fixed annual entitlements to income and capital (the trustee can not reduce your entitlements)

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 CLR 598.

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.

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