Unit & Discretionary Trusts
In Australian commercial practice, trusts are not a peripheral legal device; they are an important legal mechanism widely used in corporate structuring, asset management and tax planning.
In New South Wales in particular, trust structures are routinely used to hold businesses, distribute income, ring-fence risk and support long-term wealth planning, with applications well beyond traditional “family wealth management”.
As a matter of law, a trust is not a separate legal person but a legal relationship: the trustee holds assets on behalf of the beneficiaries and manages and distributes them in accordance with the trust deed.
The relationship is governed by equity together with state legislation (for example the Trustee Act 1925 (NSW)), while tax treatment is determined under federal taxation law. In practice, different types of trust produce very different legal and tax consequences.
Unit trusts and discretionary trusts are the two most common forms.
They differ fundamentally in how income is distributed, how control is exercised and in the scenarios to which they are suited; the choice of structure therefore generally turns on the business objectives, the relationships between the parties and the longer-term development path.
For a business, a trust is not just a “way of holding assets”. It is a structure that brings together control, distribution, risk separation and tax planning.
Where the design is not approached carefully at the outset, later financing rounds, new partners, exit arrangements or disputes can be constrained by the structure itself.
In this work, NS Legal generally takes the overall operation and stage of the business into account, helps clients understand the legal effects of different trust structures, and seeks to balance flexibility and control when a structure is being established or adjusted.
What is a Trust
Under Australian law, a trust is a legal arrangement under which one party (the trustee) holds and manages assets, not for its own benefit but for the benefit of another (the beneficiaries).
The essence of a trust lies not in the assets themselves, but in the body of rights and obligations that surround them. A typical trust structure usually involves:
| Trustee | responsible for managing trust assets and making decisions, often a corporate trustee; |
|---|---|
| Beneficiaries | those who are entitled to the income or property of the trust; |
| Settlor | the person who establishes the trust (usually with no further role after establishment); |
| Trust Deed | the central document that sets out how the trust operates. |
It is important to note that a trust is not a separate legal person, and assets are usually held in the name of the trustee.
The trustee’s legal responsibility, decision-making powers and the constraints imposed by the trust deed therefore play a decisive role in the overall structure.
When Should You Consider a Trust Structure?
In practice, the following situations are usually appropriate triggers for considering a trust arrangement early:
- At company formation, when the appropriate holding structure is being chosen;
- Before entering into an investment, joint venture or real estate project;
- Where there is a need to plan income distribution or tax;
- Where family members or multiple parties may be involved;
- Before expansion or financing, when the structure may need to be optimised.
The earlier the structure is designed, the more flexibility there generally is in the future, and the lower the cost of later adjustment.
Unit Trust vs Discretionary Trust
Although both are trust structures, the underlying logic of each differs significantly.
Unit Trust
A unit trust is similar to a structure in which interests are held “by share”. The beneficiaries’ interests are represented by units, with each unit reflecting a proportionate interest in the trust.
Income is generally distributed in proportion to units held, in a manner similar to dividend distribution among company shareholders. The features of this structure include:
- Clear, fixed proportions of interest;
- Predictability in distributions;
- A structure that lends itself to bringing in investors or multiple parties.
Unit trusts are therefore commonly used in:
- Multi-party investments or joint ventures;
- Property development or holding structures;
- Commercial arrangements where clear proportional interests are required.
Discretionary Trust (also known as a Family Trust)
A discretionary trust does not distribute income in fixed proportions. The trustee, exercising discretion, allocates income or property among the beneficiaries. Key features include:
- High flexibility in distribution;
- The ability to distribute to different beneficiaries in different years;
- Common use in tax planning and family asset management.
This kind of structure is typically suited to:
- Family businesses or family asset holding;
- Situations requiring flexibility in income distribution;
- Long-term wealth planning.
At the same time, this flexibility also means that: Beneficiaries do not hold fixed entitlements. As a result, when bringing in external investors or addressing control, the position may not be as clear as under a unit trust.
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Key Considerations in Choosing a Trust Structure
In NSW commercial practice, the choice of trust structure is rarely a single legal question, it is a balance between several factors. Different businesses, at different stages, will weight those factors differently.
Control and Decision-Making
Control in a trust generally sits at the trustee level, not with the beneficiaries themselves.
In a unit trust, control tends to be reflected through unit holdings; in a discretionary trust, control depends more on the arrangement of the trustee and the appointor.
Where multiple parties or investors are involved, the design of the control mechanism is therefore critical.
Income Distribution
Unit trusts emphasise proportional distribution and are suited to investment structures where fairness and transparency are important. Discretionary trusts provide greater flexibility, allowing adjustment to circumstances.
This difference has practical implications for tax planning and cash flow management.
Tax and Commercial Planning
While the specific tax outcome depends on the case at hand, discretionary trusts are commonly used in income splitting and tax planning, whereas unit trusts are more often used for investment structures and income-sharing arrangements.
Up-front planning generally needs to take accounting and tax advice into account.
Financing and Investment
Where external investors are to be brought in or capital raising is contemplated, a unit trust generally has the advantage, because the interests are clearly defined and quantifiable.
The uncertainty inherent in a discretionary trust’s distributions can create challenges for financing.
Risk Separation and Asset Protection
Trust structures are often used to separate operating risk from asset risk, but the effectiveness of that separation depends on how the structure is established and the choice of trustee.
Using a corporate trustee, for example, can help manage liability exposure to a certain extent.
Common Issues in Practice
In practice, issues with trust structures often emerge as they are used over time. Common examples include:
- The trust deed has not properly anticipated future expansion or investment;
- The control structure (such as the appointor’s powers) is unclear;
- The distribution mechanism does not match actual commercial needs;
- The structure lacks flexibility when partners are brought in or assets are sold;
- The relationship between the trust and the corporate structure has not been planned carefully.
These issues may have limited impact in the early stages of a business, but they can become significant obstacles during financing, M&A or disputes.
Where you are considering establishing a trust, NS Legal recommends obtaining legal advice early.
How We Can Help
In trust matters, NS Legal’s role generally extends beyond establishing the trust or preparing the documents.
We help clients understand the longer-term implications of different structures from the perspective of the business as a whole. We can help clients to:
- Analyse the business model and objectives, and select an appropriate trust structure;
- Draft and review the trust deed, ensuring that key clauses meet actual requirements;
- Design control and distribution mechanisms;
- Adjust existing structures when investment, transactions or restructuring occurs;
- Provide legal solutions when disputes or structural issues arise.
Our focus is on ensuring that a trust structure is workable not only at the point of establishment, but also throughout the development of the business.
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Frequently Asked Questions
Should I establish a discretionary (family) trust or a unit trust?
The answer depends on your commercial objectives, the parties involved and your future plans. In general, if your focus is on:
Family asset holding;
Flexibility in income distribution;
Long-term wealth arrangements;
Scope for tax planning;
then a discretionary trust (often referred to as a family trust) is a common choice. If, on the other hand, your situation is closer to:
Multiple parties investing together;
A joint venture arrangement;
Property development or investment;
A need to clearly define proportional interests;
The possibility of bringing in further investors in the future;
then a unit trust is usually more suitable. The most practical question is usually: which structure better fits your commercial arrangements and your longer-term direction? NS Legal can take your business model and longer-term plans into account and help assess which trust structure is more appropriate.
Can a family trust really reduce my tax burden?
In certain cases, trust structures can provide scope for tax planning, but “setting up a trust” cannot simply be equated with “paying less tax”. The actual tax outcome will be affected by a range of factors, including:
The type of trust
The way income is distributed
The beneficiary structure
The underlying commercial arrangements
Whether the arrangement meets the requirements of the tax law
Whether the ATO accepts that the arrangement has a genuine commercial basis
Discretionary trusts, for example, are often used in income splitting given the flexibility of their distribution mechanism. Where the structure is poorly designed or lacks commercial substance, however, that flexibility can give rise to tax risk. NS Legal generally approaches this work from a legal structure and commercial planning perspective, working with accountants or tax advisers where required.
I already have a trust structure, can it be changed later?
It can, but whether and how a change is appropriate depends on how the existing structure has been designed. Many businesses and investors initially adopt relatively simple trust structures, but as the business grows, new needs emerge, for example:
Bringing in partners
Bringing in investors
Adjusting control
Selling a business or asset
Corporate restructuring
The existing distribution model no longer fitting the current arrangements
In some cases, the position can be addressed by amending the trust deed, restructuring or using other legal mechanisms. Some changes, however, may have tax implications, legal risks or stamp duty consequences. These matters therefore generally call for a review of the existing structure and risk profile. NS Legal can review your current trust structure and help assess a more prudent path for any adjustment.
Does holding assets through a trust always achieve asset protection and risk separation?
Not necessarily. Many people view trusts simply as “asset protection tools”, but the effectiveness of that protection depends heavily on how the structure is designed. Matters typically to be considered include:
Who acts as trustee
Whether a corporate trustee is used
How control is arranged in the trust deed
Whether there are personal guarantee exposures
Whether assets and operating risk are genuinely separated
Whether the overall commercial structure is sensible
Where the structure is not designed properly, a trust may not deliver the risk separation that was expected. A trust, in other words, does not provide protection automatically. What matters is how the structure is designed and whether it matches the actual commercial arrangements. NS Legal can review existing or proposed trust arrangements from a legal-structure perspective and help assess whether they will actually achieve the intended objectives.
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