A unit trust is a type of trust where the assets are held and administered by the trustee of the trust for the holders of units in the unit trust. Unit trusts pre-determine the unitholder’s entitlements to income, capital, or both. Most unit trusts are established by subscription with the initial unitholders applying for and being issued units in the unit trust (basically similar to applying for shares in a new company).
Unit trusts are an attractive structure when non related parties want to join together to operate a business or make investments.
Unit trust structures have the following advantages:
- Each party’s investment interest is fixed through their ownership of units in the unit trust (basically similar to shares in a company).
- Ability to pool resources with other investors.
- The unit trust profits are distributed to the unitholders in proportion to their percentage unitholding in the trust. Each unitholder is taxed on their trust distribution at their marginal tax rates.
- The unitholders receive the general 50% CGT discount on any capital gains made by the unit trust on investments held for greater than twelve months. In contrast companies do not receive the general 50% CGT discount.
- Easy to introduce new investors into the unit trust or exit other unitholders.
A disadvantage of unit trusts, and trusts in general, is that they cannot distribute losses to the unitholders. Any losses incurred by the unit trust must be carried forward to be offset against future income.