Unit trust or company? What actually decides it
Both give every owner a defined, transferable stake, so both work between unrelated parties. The choice turns on two things that pull in opposite directions: whether profit can stay in the entity, and whether the character of income survives the trip out to the owners.
This question comes up whenever the people involved are not related to each other. Both a unit trust and a company give every owner a defined, transferable stake – units in one, shares in the other – so both do the job a discretionary trust cannot, which is to make each person's entitlement fixed and unarguable.
Once that is settled, the choice between them turns on two things, and they pull in opposite directions: whether profit can stay in the entity, and whether the character of income survives the trip out to the owners.
| Company | Unit trust | |
|---|---|---|
| Retaining profit | Yes – taxed at the company rate and left to reinvest | No – income must be distributed each year |
| 50% CGT discount (replaced from 1 July 2027) | Lost – a company cannot pass it on | Flows through to individual unitholders, for gains accrued to 1 July 2027 |
| Foreign tax paid | Reduces the company’s own tax, but never becomes a franking credit | Flows through as a foreign income tax offset the unitholder can use |
| Franked dividends received | Credits sit in the franking account until a dividend is paid | Credits flow straight through with the distribution |
| Losses | Trapped in the company, subject to the ownership and business tests | Trapped in the trust – they cannot be distributed to unitholders |
The company can hold on to the money
This is the company's real advantage. Profit that stays in the business is taxed once at the company rate and can be reinvested from there, with tax at the owner's marginal rate deferred until a dividend is actually paid. Where a business needs working capital – stock, equipment, staff, a bigger site – that deferral is money still working rather than money paid out in tax and put back in afterwards.
A unit trust cannot do that. Income has to be distributed each year, and unitholders are taxed on their share whether or not the cash ever left the trust. That is a familiar and unwelcome conversation where the money was needed in the business: a tax bill arrives for income the unitholder never saw.
Worse, missing the distribution is not a neutral outcome. If nobody is presently entitled by 30 June, the trustee is assessed on the undistributed income at the top marginal rate. It is not a decision that can be left until the accounts are done in October.
But everything comes out of a company as a dividend
That is the cost of the company's separateness, and it is the part that gets underestimated.
A company pays its own tax and then pays dividends. Whatever the income was on the way in – a capital gain, foreign earnings, a franked dividend from somewhere else – it is a dividend on the way out. The credits attached to it are franking credits, and franking credits arise only from Australian tax the company has actually paid.
Foreign tax is where that bites
A company earning foreign income claims a foreign income tax offset against its Australian tax. Sensible in itself – but it means less Australian tax is paid, so less is credited to the franking account.
The foreign tax does not convert. It reduced the company's bill and then disappeared. The shareholder receives a dividend that is partly or entirely unfranked, taxed again at their marginal rate with nothing to offset it. The tax was genuinely paid, and the owner genuinely cannot use it.
Run the same income through a unit trust and the offset keeps its character all the way to the unitholder, who claims it against their own tax.
Capital gains behave the same way
A gain made in a company is taxed in full at the company rate – a company cannot access the 50% CGT discount and cannot pass it to shareholders. A gain made in a unit trust reaches individual unitholders with the discount intact.
Where the plan involves holding something that grows in value and selling it later, that single difference can outweigh every year of company-rate advantage that came before it.
This changes on 1 July 2027. Legislation assented in June 2026 replaces the 50% discount for individuals and trusts with cost-base indexation, plus a minimum 30% tax rate on gains for resident individuals. Assets held before then are deemed sold and reacquired at market value just before that date, so the gain accrued to that point keeps the discount and is taxed only when you actually sell; growth after it is indexed instead. Companies are unchanged – they never had the discount to lose.
So the comparison above still describes gains accrued up to 1 July 2027, and needs to be redone for anything after. Some of the detail is also unfinished: the "new residential dwelling" carve-out awaits a definition by legislative instrument, and a further tranche covering rollovers, foreign residents, consolidated groups and AMITs was still in consultation in August 2026. Worth advice on your own facts rather than a rule of thumb.
In short: a company suits profit that stays in the business, and a unit trust suits income whose character is worth preserving – capital gains, foreign income, or franked dividends being passed along. Where a business does both, that is usually an argument for more than one entity rather than a compromise between them.
Before you settle on either
Capital gains treatment is affected by the May 2026 Budget, and so are discretionary trusts if one is part of the wider structure. That makes this a bad year to settle an entity choice on last year's rules.
It is also worth remembering that this is only the question of what the business trades through and who holds it. Who ultimately owns the units or the shares is a separate decision, and usually the more consequential one – a trust above a company changes the tax, the protection and what happens on a sale.
Our business structuring page works through that, including a short tool for the trading entity decision and an ownership checklist for the part no questionnaire can answer. The individual structures have their own posts too – the company, trusts, the sole trader and the partnership.