Discretionary Trust vs Unit Trust in Australia: Which One You Need (2026)

What each structure actually does

A discretionary trust (often called a family trust) holds assets for a class of beneficiaries — usually family members. Under a trust deed governed by the general law of equity in each state, the trustee decides annually who receives income and in what proportions. Nothing is pre-allocated. A beneficiary with no fixed entitlement cannot demand a distribution; they hold a mere expectancy.

A unit trust splits the trust fund into equal units. Each unitholder owns a defined fraction of the whole — say 100 out of 1,000 units, giving them a 10 % interest in income and capital. The unitholders' register records every transfer, and distributions flow automatically in proportion to units held. Unit trusts closely resemble a company shareholding in practical effect, without the Corporations Act 2001 compliance burden that comes with a Pty Ltd.

Tax flexibility: where discretionary trusts lead

The discretionary trust's main attraction is income-splitting. A trustee can stream franked dividends to beneficiaries in lower marginal tax brackets under the streaming rules in Division 207 of the Income Tax Assessment Act 1997 (ITAA 1997). Each year, instead of all trust income hitting one taxpayer at 47 %, the trustee can distribute across a spouse, adult children and a bucket company to stay below the 32.5 % threshold.

The 50 % CGT discount under Division 115 of ITAA 1997 applies to both structures when the trust holds an asset for more than 12 months — but only when the gain is distributed to an individual or complying super fund. Individual beneficiaries of a discretionary trust can receive the discounted gain directly. Unit trusts pass the discounted gain through to individual unitholders in proportion to their units, which works fine when the unitholders are individuals, but creates problems when a corporate unitholder receives the distribution — companies do not access the 50 % discount.

Family trust elections under Subdivision 272-B of Schedule 2F ITAA 1936 let a discretionary trust carry forward losses and transfer them between group entities, provided the trust nominates an individual as the "test individual." Without the election, trust losses are quarantined. Unit trusts do not make family trust elections — their fixed entitlements already satisfy the continuity of ownership tests that companies and widely held trusts rely on.

Asset protection: comparing the two

Assets held inside a discretionary trust are not owned by any beneficiary — beneficiaries hold a general equitable interest in the fund, not in specific assets. A creditor of a beneficiary cannot seize trust property because the beneficiary has no fixed entitlement to any particular asset. This protection is genuine, subject to fraudulent transfer provisions under state property law (e.g., the Conveyancing Act 1919 (NSW), s 37A).

A unit trust offers weaker protection. Units are a form of property and can be seized by a creditor or become available to a trustee in bankruptcy under s 116 of the Bankruptcy Act 1966. The creditor steps into the unitholder's shoes and holds the units — or forces a redemption — depending on the trust deed. For asset protection, discretionary trusts are the stronger vehicle.

There is one exception worth noting: a unit trust used inside a self-managed super fund (SMSF) structure, where units are held by the SMSF trustee, enjoys the super fund's own creditor-protection regime under the Superannuation Industry (Supervision) Act 1993. The protection flows from the SMSF, not the unit trust itself.

Stamp duty and state-level differences

Transferring interests in a unit trust can trigger stamp duty in most states because units are treated as dutiable property when the trust holds dutiable property (such as land). In New South Wales, s 11 of the Duties Act 1997 imposes duty on transfers of land and on transfers of interests in a unit trust that holds land. A 50 % change in unit trust ownership can trigger landholder duty as if the land itself were transferred.

Discretionary trusts that hold land face duty on the original settlement and on any change in the trust property, but a discretionary beneficiary's interest is not unitised — so shifting income distributions between family members does not trigger stamp duty events. This distinction is a significant planning advantage for discretionary trusts holding real property.

State differences matter. Victoria has narrowed the circumstances in which duty applies to trust dealings under the Duties Act 2000 (Vic), but Queensland still applies duty to a broader range of trust dealings under the Duties Act 2001 (Qld). Before settling a unit trust that will hold Queensland land, a property lawyer should model the duty exposure across the full ownership chain.

Proportional ownership and co-investor structures

A unit trust is the standard vehicle for joint ventures, syndicated property investments and small business co-ownership where two or more unrelated parties each want a fixed, measurable share. The fixed entitlement lets each investor know exactly what they own, calculate their return and, if the deed allows, sell or mortgage units independently.

Discretionary trusts do not work for unrelated co-investors. No investor would accept a structure where the trustee controls distributions — that trustee is typically one investor's family company. For commercial property syndicates, development joint ventures or any arrangement where investors need certainty, a unit trust or a company is the correct vehicle.

The hybrid option: a discretionary unit trust

Some practitioners use a discretionary trust that holds all the units in a unit trust. The unit trust holds the operating business or real property and provides legal certainty for external parties (e.g., lenders, JV partners). The discretionary trust above it captures the income from the units and distributes it flexibly across family beneficiaries. Stamp duty and tax structuring of this arrangement should be modelled carefully before implementation — the ATO has considered several hybrid arrangements under the anti-avoidance provisions of Part IVA ITAA 1936.

Setting up the deed

Both structures require a written trust deed executed by the settlor and trustee before any assets are transferred in. The deed governs the trustee's powers, how income is defined (accounting income vs net income as defined under s 95 of ITAA 1936 — a distinction that matters after the High Court's decision in Commissioner of Taxation v Bamford [2010] HCA 10), and what happens on winding up.

A free Australian discretionary trust deed template from forms-legal.com covers the standard provisions: trustee powers, income distribution clauses, addition and removal of beneficiaries, and a vesting date within 80 years as required to avoid the rule against perpetuities (applied in most states). Review the deed against your specific state's stamp duty rules before signing.

For a unit trust, the deed must specify the number of units on issue, the unit subscription price, the mechanism for issuing or redeeming units, and voting rights on trustee replacement. The unitholders' register is a separate document maintained alongside the deed.

A practical decision guide

Choose a discretionary trust when: all beneficiaries are family members, income-splitting across tax brackets is the primary objective, the trust will hold assets over the long term, and asset protection from a beneficiary's personal creditors matters.

Choose a unit trust when: there are two or more unrelated investors, each party needs a legally certain and measurable interest, units may need to be transferred or used as security, or the structure feeds into a managed investment scheme under Part 5C.2 of the Corporations Act 2001.

Review the choice every few years. A business that starts as a family arrangement and later brings in outside investors often needs to convert — a process that can trigger CGT and stamp duty events, so the exit costs should be built into the original planning.

Getting professional advice

A trust is a long-lived structure. Errors in the original deed — such as an income definition that diverges from ITAA 1936 s 95 concepts, or missing trustee succession provisions — surface years later at the worst time. The ATO's Trust Tax Time Toolkit, updated for the 2025–26 year, sets out the reporting obligations for both structures. The Commissioner has flagged trust-income streaming arrangements as a compliance focus for 2026. Running the numbers with a registered tax agent before execution is not an optional step — it is the one place where the upfront cost clearly pays for itself.