A family trust is built for one family whose needs change year to year. A unit trust is built for people who want certainty: each party knows exactly what share they own, what they'll receive and what they can sell. That makes it the default vehicle when unrelated people put money into the same asset.
This guide covers how a unit trust works, how it compares with a discretionary trust and a company, how it's taxed (including tax-deferred distributions and CGT event E4), the land tax and stamp duty traps, and what belongs in the agreement between unitholders.
What is a unit trust?
A unit trust is a trust whose deed divides the beneficial interest into units. Unitholders are entitled to the trust's income and capital in proportion to the units they hold. If you hold 500 of 1,000 units, you're entitled to half the income each year and half the capital when the trust ends or the asset is sold.
The roles are the same as any trust:
| Role | In a unit trust |
|---|---|
| Trustee | Usually a company, with a director from each investing party. Legally owns the assets and signs the contracts |
| Unitholders | The investors. Can be individuals, companies, family trusts or SMSFs |
| Deed | Sets out how units are issued and redeemed, how income is worked out, voting and how the trust ends |
| Unitholders' agreement | A separate contract between the investors covering exits, deadlocks, funding and valuation |
Do unit trusts have appointors?
Some do, many don't. In most unit trusts, control comes from the unitholders' voting rights (often a majority or special majority can replace the trustee) and from who the directors of the trustee company are. Read the deed: a unit trust where one person holds an appointor power over a 50/50 investment isn't really a 50/50 investment.
Unit trust vs discretionary trust: what's the difference?
| Unit trust | Discretionary (family) trust | |
|---|---|---|
| Who gets the income | Unitholders, in proportion to their units | Whoever the trustee chooses each year |
| Best for | Unrelated parties investing together | One family's business or investments |
| Can you sell your interest? | Yes, transfer or redeem your units | No interest to sell; beneficiaries only have an expectancy |
| Income splitting | Fixed. No flexibility year to year | Flexible, within the deed and integrity rules |
| Protection from a beneficiary's creditors | Weak. Units are the unitholder's property | Strong. A beneficiary owns nothing until a distribution is made |
| Annual resolution | Often not needed if the deed makes unitholders automatically entitled. Check the deed | Must be made by 30 June |
| Proposed 30% minimum tax from 1 July 2028 (a Bill, not law) | Fixed trusts are excluded as introduced, if they meet the Bill's new fixed trust definition | Would apply |
| State land tax | Often treated like individuals, if the trust meets the state's fixed trust rules | Often a lower threshold or surcharge in some states |
The common answer for unrelated parties is both: each family's discretionary trust holds units in a shared unit trust. Each family gets the flexibility and protection of its own trust, and the joint venture gets fixed, saleable shares.
If you're new to family trusts, start with our family trust explainer.
Unit trust vs company: which is better for investing together?
| Unit trust | Company | |
|---|---|---|
| Tax on income | Passed through to unitholders at their rates | 25% or 30% in the company; top-up tax when paid out as dividends |
| CGT discount | Flows through to individual and trust unitholders (on growth to 30 June 2027) | Not available |
| Distributing tax-free cash (e.g. from depreciation) | Yes, as tax-deferred distributions | No; cash paid out is generally a dividend |
| Losses | Trapped in the trust | Trapped in the company |
| Division 7A | Doesn't apply to the trust directly | Applies to loans and payments to shareholders |
| Best for | Property and long-term passive investments | Trading businesses and retaining profit |
For a property held for rent and growth, a unit trust usually beats a company on tax. For a trading business that will retain profit, a company is usually better. See our sole trader vs company vs trust guide for the trading side.
How is a unit trust taxed?
The trust works out its net income each year. Unitholders who are presently entitled to the trust's income include their share in their own tax returns. If no one is presently entitled, the trustee can be taxed at the top rate.
Do unit trusts need distribution minutes?
It depends on the deed. Many unit trust deeds make unitholders automatically and proportionately entitled to the income at the end of each year, so no resolution is needed. Others require the trustee to determine the income or the distribution by 30 June. If yours is the second kind and nobody signs, you have the same problem as a family trust that misses its resolution. The ATO's trustee resolutions page sets out the timing rules.
Capital gains
When the trust sells an asset, the gain passes to unitholders. Individuals and family trusts can apply the CGT discount if the asset was held for at least 12 months. Under the Tax Reform No. 1 Act 2026, which is law, the 50% discount is replaced by cost base indexation for growth after 30 June 2027; growth up to then keeps the discount. Company unitholders get no discount either way. Our guide to the CGT discount changes explains the transition.
When you sell your units, that's your own CGT event, with the discount available on the same terms if you've held them for 12 months or more.
What is CGT event E4 (tax-deferred distributions)?
Property trusts often pay out more cash than their taxable income, mainly because capital works deductions on the building reduce taxable income without costing cash. The extra cash is a tax-deferred (non-assessable) distribution.
It isn't taxed when you receive it. Instead, CGT event E4 reduces the cost base of your units by that amount. When you eventually sell, your capital gain is larger. If the tax-deferred amounts ever reduce your cost base to zero, any further non-assessable amount is a capital gain in that year. The ATO explains this on its CGT event E4 page.
Worked example
Hypothetical, rounded figures.
Two unrelated families, the Parks and the Rossis, each put $500,000 into a unit trust through their own family trusts. The unit trust borrows $1 million and buys a $2 million warehouse. Each family trust holds 500,000 units at $1 each.
In year one:
| Whole trust | Each family trust (50%) | |
|---|---|---|
| Rent | $140,000 | $70,000 |
| Interest, rates, insurance, repairs | $60,000 | $30,000 |
| Cash available to distribute | $80,000 | $40,000 |
| Capital works deduction (no cash cost) | $20,000 | $10,000 |
| Taxable net income | $60,000 | $30,000 |
| Tax-deferred amount | $20,000 | $10,000 |
Each family trust receives $40,000 of cash. $30,000 is taxable and can be distributed to that family's beneficiaries as each family sees fit. The other $10,000 isn't taxed now; it reduces the cost base of the family trust's units from $500,000 to $490,000. When the family trust later sells its units, its capital gain is $10,000 larger for each year of similar tax-deferred amounts.
That's the main appeal of the structure: fixed, saleable shares between the families, with each family keeping its own flexibility.
Land tax and stamp duty: the traps
Unit trusts and state taxes interact in ways that catch people out. Rules differ by state, so check before you buy.
- Land tax. Several states charge trusts land tax at a lower threshold or a higher rate, but treat a trust that meets their definition of a "fixed trust" more like an individual. Whether your unit trust qualifies depends on the deed. A unit trust where the trustee can issue or redeem units at its discretion may not count as fixed.
- Foreign surcharges. If any unitholder is foreign, or a family trust unitholder has foreign beneficiaries, surcharge land tax and duty may apply in some states.
- Landholder duty. Selling or issuing units in a trust that holds land above a state threshold can attract duty as if the land itself had been transferred.
- Converting a family trust into a fixed trust to save land tax can itself trigger duty. A NSW tribunal decision in 2024 held that converting a discretionary trust holding land into a fixed trust attracted duty.
Our state taxes service covers land tax and duty in every state.
What should a unitholders' agreement cover?
Two families or business partners who invest together will one day disagree, need their money back or die. The agreement should cover that before it happens. Your solicitor prepares it; these are the questions we ask our clients to settle first:
- Contributions. Who puts in what, and what happens if more money is needed.
- Decisions. Which decisions need a simple majority, a special majority or unanimity (selling the asset, borrowing, issuing new units).
- Exit. How a unitholder can sell, whether the others get first right to buy, and how the price is set (independent valuation is usual).
- Deadlock. What happens if you can't agree.
- Death, incapacity, bankruptcy or separation of a unitholder, and what triggers a compulsory sale.
- Default. What happens if a party doesn't pay their share of a capital call or a loan repayment.
- Distributions. How much cash is kept in the trust and how much is paid out.
- Who manages the books, and how often unitholders get reports.
Are there risks the ATO watches with unit trusts?
Two worth knowing.
- Using units to clear unpaid entitlements. The ATO has flagged arrangements where a private company subscribes for units in a unit trust to use up an unpaid trust entitlement or get around Division 7A, and the unit trust then lends or pays money to others in the group. The ATO says these may attract Division 7A, section 100A and the general anti-avoidance rule. See the ATO's unit trust arrangements warning.
- Hybrid trusts. Trusts with both fixed units and discretionary features can lose the tax benefits of both, and may not qualify as fixed trusts for loss rules, land tax or the proposed 2028 exclusion.
Unit trusts and SMSFs
An SMSF can co-invest with family members through a unit trust that follows the Regulation 13.22C rules: no borrowing, no charges over assets, no business, and no leasing residential property to related parties. Done properly, it lets super and family money buy a property together. Done badly, one breach ends the exception for good. Read our guide to 13.22C unit trusts. Whether the SMSF should invest is a financial product decision for a licensed adviser; we handle the accounting, tax and compliance checks.
Mistakes we see with unit trusts
- No unitholders' agreement. The deed alone rarely deals with exits and disputes.
- Units held personally by someone in a high-risk job, so their creditors or separating spouse can reach the units.
- A deed that doesn't qualify as a fixed trust for the state's land tax rules.
- Missing the 30 June determination where the deed requires one.
- Not tracking tax-deferred amounts, so cost bases are wrong when units are sold.
- Issuing new units at the wrong price, which shifts value between unitholders and can create tax and duty problems.
- Running a trading business through a unit trust owned by an SMSF that's meant to be a 13.22C trust.
How BPAG helps
We advise on whether a unit trust is the right vehicle, who should hold the units, and how the numbers work for each party. Each year we prepare the unit trust's trust tax return and financial statements, track every unitholder's cost base, and prepare the distribution statements each unitholder's own accountant needs. Our trust deed agent summarises the deed and flags issues with entitlements, unit issues and control; a qualified accountant reviews it and confirms what matters. Deeds and unitholders' agreements are prepared by your solicitor, and we brief them directly. For investors buying property together, see our page for property investors.
Frequently asked questions
Can a unit trust distribute losses?
No. Like any trust, a unit trust can distribute income but not losses. A loss stays in the trust and can be carried forward against future income if the trust loss rules are met. For a fixed trust those rules are usually satisfied as long as the same people keep holding more than half the units.
Can a unit trust borrow money?
Yes. A unit trust can borrow to buy property or fund a business, usually with the lender taking a mortgage and personal guarantees from the unitholders or the trustee's directors. The exception is a unit trust that is partly owned by an SMSF under the Regulation 13.22C rules, which must not borrow at all.
Can my SMSF own units in a unit trust?
It can, but an SMSF investing in a related unit trust usually counts as an in-house asset, capped at 5% of the fund. A specific exception lets an SMSF own more, provided the unit trust follows strict rules: no borrowing, no charges over its assets, no business and no leasing residential property to related parties. One breach ends the exception permanently.
What happens to my units if I die?
Units are your property, so they pass under your will unless they're held by a company or trust. That's one reason many people hold units through a family trust, which keeps control and the investment outside the estate. The unitholders' agreement should also say whether the other unitholders can buy your units and at what price.
How much does a unit trust cost to set up?
You'll pay for the trust deed and unitholders' agreement (prepared by a solicitor), usually a trustee company with ASIC's registration fee, and stamp duty if property is bought or transferred in. Each year there's a trust tax return, financial statements and the trustee company's ASIC fee. The unitholders' agreement is where most of the legal cost goes, and it's worth it.
Official sources
General information only, current as at 18 October 2026. It is not personal tax, legal or financial product advice and doesn't take your circumstances into account. Talk to us before you act. Where a recommendation needs a licensed financial adviser or a solicitor, we work alongside them.