The trust structure: discretionary and unit trusts explained

A trust is not a thing that trades so much as a way of holding something. That distinction sounds academic and turns out to be the practical heart of the structure – it explains the liability, the annual distribution, and most of what people find surprising about trusts after they have one.

What a trust actually is

Three parts, and each does a specific job:

• The trustee holds the assets and is the party that actually enters contracts, employs people and owes the debts

• The beneficiaries are entitled to the income

• The deed is the document that governs all of it

That third one is easy to underrate. A trust does only what its deed permits. Who can be a beneficiary, what the trustee may distribute, whether the trust can be varied, when it ends – all of it comes from the deed, not from a general rule about trusts. When something in a trust cannot be done, the answer is usually in that document.

Discretionary trusts

The trustee decides each year who receives what, within a defined class of beneficiaries – typically a family and entities connected to it. That flexibility is the point: distributions can follow circumstances that change from one year to the next, so income can land where it is taxed most sensibly rather than on one person's return by default.

Nobody has a fixed entitlement until the trustee exercises the discretion. That is what makes the structure flexible and also what makes it unsuitable where the parties are unrelated – a person putting money in generally wants a stake nobody can decide against.

Unit trusts

Entitlements are fixed. Units work like shares: each holder owns a set proportion of income and capital, and the trustee has no discretion to vary it. That is what makes a unit trust workable between unrelated parties, where a discretionary trust is not.

Units can also be transferred or redeemed, which gives people a defined way in and a defined way out.

The trustee carries the liability

A trust is not a legal person, so the trustee signs the contracts and owes the debts. The trustee has a right to be indemnified out of the trust's assets – but if those assets do not cover it, the trustee pays personally.

So an individual trustee is exposed exactly as a sole trader is. Almost always the trustee should be a company set up for that purpose and doing nothing else: it holds no assets of its own, so there is little for a creditor to reach, and the people behind it are not personally on the hook.

That corporate trustee is an extra company to establish and maintain, and it is usually money well spent. It is a company like any other, though, so the same limits apply – the places where a company does not protect its directors apply to a corporate trustee too.

The income has to go out every year

This is the part that surprises people, and it is the sharpest practical difference between a trust and a company.

A trust does not generally pay tax itself. Income flows through to whoever is presently entitled to it, and they pay tax on their share at their own rate. But that entitlement has to be created by 30 June. Miss it and the trustee is assessed on the undistributed income at the top marginal rate – which is an expensive way to find out that a resolution was left until July.

Beneficiaries are taxed on their share whether or not the cash ever reached them, too. Where the money was needed as working capital, that is a familiar and unwelcome conversation. A trust cannot retain profit and pay tax on it at a low rate the way a company can, and if retaining profit is central to the plan, that is a real argument for a company instead.

The 50% CGT discount is being replaced from 1 July 2027

This matters more than anything else on this page if the plan involves holding something that grows in value, so it is worth being precise about it.

Two Acts assented on 26 June 2026 replace the 50% CGT discount for individuals and trusts, for CGT events happening on or after 1 July 2027. In its place: cost-base indexation, and for resident individuals a minimum 30% tax rate on capital gains, with exemptions for recipients of listed social security and veterans' payments. Companies are unaffected, because they never had the discount. Complying superannuation funds keep their one-third discount, which is also untouched.

Assets you already hold are not simply left alone. The law deems them sold just before 1 July 2027 and reacquired that day at market value. The gain accrued up to that point is not taxed then – it is deferred until you actually sell, and it keeps the 50% discount and sits outside the 30% minimum rate. Growth after that date gets indexation instead. So the value of the discount on what you own now is preserved and carried forward; what changes is everything the asset earns from 1 July 2027 on. Pre-CGT assets, held since before 1985, are brought into this too.

Two pieces are still not settled. The carve-out that keeps a 50% discount for new residential dwellings depends on a definition the Minister has to make by legislative instrument, and no instrument has been registered yet. The method for apportioning a gain across the changeover, as an alternative to a market valuation at 30 June 2027, is also still in draft – so the default today is a valuation. A further tranche dealing with rollovers, foreign and temporary residents, consolidated groups and AMITs was still in consultation as at August 2026.

The practical consequence for anyone structuring now: the arithmetic that made a trust the obvious holder of an appreciating asset still holds for gains accrued up to 1 July 2027, and needs redoing for everything after it. If you are in one of the categories in the unfinished tranche, it cannot be settled off the current Act at all. Talk to us before you commit to a structure on the strength of the old rule.

What a trust gives you

What it costs you

Establishment and ongoing compliance. A deed, usually a corporate trustee to establish and maintain, a trust tax return each year, and distribution resolutions that have to be made properly and on time.

Losses are trapped, and harder to use than a company's. A trust cannot distribute a loss. It stays in the trust to be offset against future income, subject to trust loss rules that are meaningfully more complex than the company equivalents.

It has to be administered. Trusts are the structure most often found not being run the way the deed says. Resolutions missed, beneficiaries added who were never in the class, distributions recorded after the fact. A trust that is not administered properly does not deliver what it was set up to deliver.

Is a trust right for you?

A trust is rarely the answer on its own. It is usually the layer that sits above a trading entity – holding the shares in a company, or holding the assets that the trading business uses – rather than the thing that does the work.

That is a deliberate arrangement rather than a complication: the company carries the risk, the trust holds what you want kept away from it. Whether it is worth doing depends on how much there is to protect and how much complexity you will realistically maintain, and it is premature far more often than people expect.

Our business structuring page works through that, with a short tool for the trading entity decision and the ownership questions worth settling before anything is registered. If it is specifically a unit trust against a company you are weighing, that comparison has a post of its own. The other structures do too – the sole trader, the partnership and the company.