The core difference in one paragraph
A discretionary trust gives the trustee complete discretion to decide, each financial year, which beneficiaries receive income and capital from the trust. A unit trust splits ownership into fixed units, and each unit holder is entitled to their proportional share of income and capital based on how many units they hold. That single mechanical difference shapes everything else about how the two structures behave: who they suit, how flexible they are at tax time, what happens when someone wants out, and how comfortable a court or creditor will be looking through the trust to attach assets.
Both structures sit on top of the same legal scaffolding. A trust is not a separate legal entity in Australia. It is a relationship where a trustee holds assets for the benefit of others. The trustee can be an individual or a Pty Ltd company, and in almost every case a Pty Ltd trustee is the right call for liability and continuity reasons. We cover that further down.
Trust, in plain English
A legal relationship where one party (the trustee) holds assets and runs them for the benefit of others (the beneficiaries or unit holders). The trust itself is not a company or a person.
How a discretionary trust works
A discretionary trust, often called a family trust when the beneficiaries are all related, starts with a trust deed drafted by your solicitor. The deed names the settlor (who puts in the initial nominal sum), the trustee (the entity that runs the trust), the appointor (the person who can hire and fire the trustee), and a class of potential beneficiaries. That class is usually broad: parents, spouses, children, grandchildren, and often related companies or trusts.
Until the trustee makes a resolution in someone's favour, no one in that class is entitled to anything. Each financial year before 30 June, the trustee decides how to distribute the trust's net income for that year. The trustee can split income across multiple beneficiaries, give it all to one person, or retain it inside the trust. Income retained and undistributed is taxed at the top marginal rate set by the Australian Taxation Office (ATO), so most family trusts distribute everything each year.
That annual flexibility is the whole point of a discretionary trust. If one beneficiary has a quiet year and another has a high-income year, the trustee can distribute more to the person on the lower marginal rate. The Australian Taxation Office (ATO) has rules around this, including streaming, anti-avoidance, and the rules covering minor beneficiaries, so any distribution strategy needs to be run past your accountant before 30 June.
Who a discretionary trust suits
A single family unit where the goal is asset protection, intergenerational wealth, and flexible income distribution to family members on different tax brackets. Common pairings include a family trust holding shares in a trading company, a trust holding investment properties, and a trust running a small family business directly.
How a unit trust works
A unit trust looks more like a company in how ownership is structured. The trust deed creates a fixed number of units, and each unit represents a defined entitlement to income and capital. If you hold 30 of 100 units issued, you are entitled to 30 percent of every distribution the trustee makes, and 30 percent of the assets if the trust is wound up. The trustee still runs the trust, but it has no discretion over the split. Income flows in fixed proportions.
Units can be bought, sold, or transferred, subject to whatever the deed says about transfer restrictions. That makes unit trusts the natural choice when unrelated parties pool capital into a single venture or asset. Two families buying a commercial property together, for example, might each hold units in a unit trust that owns the property, with the unit register acting as the equivalent of a share register.
Unit trusts are also common when a self-managed super fund (SMSF) wants to co-invest in an asset alongside another investor. SMSFs have strict rules under the Superannuation Industry (Supervision) Act about how they can hold property and who they can hold it with, and a unit trust is one of the limited structures the Australian Taxation Office (ATO) accepts in some configurations. Your SMSF accountant or licensed adviser must sign off on the structure first.
Who a unit trust suits
Two or more unrelated parties going into business or holding an asset together where each party wants their share to be visible, transferable, and protected from the others changing the split unilaterally. It is the trust equivalent of a company with shareholders.
Discretionary vs unit trust at a glance
The table below summarises the practical differences. Trust law is dense and every deed is drafted differently, so this is a high-level guide rather than legal advice on your specific situation.
Discretionary trust vs unit trust
| Feature | Discretionary trust | Unit trust |
|---|---|---|
| Who decides distributions | Trustee, each financial year | Fixed by units held |
| Beneficiary entitlement | None until trustee resolves | Defined by unit holding |
| Typical use | Single family wealth and business | Unrelated parties co-investing |
| Ownership transfer | Not applicable — no fixed shares | Units can be sold or transferred |
| Asset protection vs personal creditors | Generally strong | Weaker — units are a personal asset |
| Income streaming flexibility | High (per ATO rules) | Low — proportional to units |
| Suits SMSF co-investment | No | Sometimes — strict conditions apply |
| Trustee company structure | Pty Ltd recommended | Pty Ltd recommended |
Asset protection: where the two diverge
This is where discretionary and unit trusts behave quite differently. In a discretionary trust, no beneficiary has a fixed entitlement until the trustee decides in their favour. That means if a beneficiary is sued personally or goes bankrupt, the creditor cannot easily reach into the trust to attach assets. The trust assets are not legally the beneficiary's property. They are the trustee's, held for a class of people who only have an expectation.
Courts can and do look through poorly structured trusts where the settlor and trustee and beneficiary are effectively the same person doing the same things they would have done without the trust. The cases turning on this point are technical, and the protection is not absolute. But for genuine family trusts run at arm's length by a corporate trustee, discretionary trusts are well established as a legitimate asset protection structure.
Unit trusts offer weaker personal asset protection. A unit holder's units are property they personally own, the same way a shareholder owns shares. If the unit holder is sued or goes bankrupt, the units form part of their personal estate and can be attached or sold by a trustee in bankruptcy. The trust assets themselves are still inside the trust, but the unit holder's interest in those assets is exposed.
Both structures protect the trustee from personal liability, provided the trustee is a Pty Ltd company. That is the single most important reason to use a corporate trustee instead of acting as an individual trustee.
Asset protection is not a substitute for insurance
Trust structures help with creditor risk and intergenerational continuity. They do not replace professional indemnity, public liability, or workers compensation insurance for whatever activity the trust funds.
Tax differences at a high level
Both discretionary and unit trusts are flow-through entities for income tax purposes. The trust itself does not usually pay tax on income distributed before 30 June each year. Instead, the beneficiaries or unit holders include their share of trust income in their own tax returns and pay tax at their personal rates. Both trust types lodge an annual trust tax return with the Australian Taxation Office (ATO).
The key tax difference is flexibility. A discretionary trust lets the trustee adjust the split each year to take advantage of lower marginal rates among the beneficiaries. A unit trust cannot do that — distributions follow unit holdings exactly. There are also nuanced differences in how capital gains, franked dividends, and trust losses flow through each structure, and how each interacts with the Goods and Services Tax (GST) registration threshold of $75,000 if the trust runs a business.
None of this is tax advice for your situation. Trust taxation is one of the more complex areas of Australian tax law, and the rules around streaming, family trust elections, and unpaid present entitlements change regularly. Talk to your accountant or solicitor about how the rules apply to what you are trying to do.
The trustee company sits behind both
Whichever trust type you choose, the trustee should almost always be a Pty Ltd company rather than one or two individuals. The Australian Taxation Office (ATO) is explicit about this for self-managed super funds (SMSFs) and the same logic applies to family and unit trusts. A corporate trustee separates trust liability from personal liability, gives the trust continuity when a member dies or leaves, simplifies asset titles, and removes the admin churn of changing trustees every time circumstances change.
A trustee company is registered with the Australian Securities and Investments Commission (ASIC) as a standard Pty Ltd. The $611 ASIC registration fee is the same whether it acts as a trustee or trades in its own right. Once registered, the ASIC annual review fee for 2025–26 is $329 for a standard proprietary company, or $67 if the company qualifies as a special-purpose trustee company. Late fees apply if you miss the annual review deadline: $98 for 1–28 days late, $411 for over 28 days late.
Structly registers trustee companies for $699 all-in, including the $611 ASIC fee. That covers the company itself. The trust deed (whether discretionary or unit) is drafted by your solicitor, and the Australian Business Number (ABN) for the trust is set up via the Australian Business Register (ABR) once the trustee company exists. Stanley can help you map the right sequence if you tell us what the trust is for.