Why a unit trust and not a company?

There are several key issues that make it undesirable to use a company structure to raise private capital. Each stems from the way companies are regulated through the Corporations Act 2001.

Among these are the associated, and often onerous and costly, administrative and reporting obligations that are monitored by ASIC. There are limits to the number of investors/shareholders you can have, and the requirement to notify ASIC of each new investor and their shareholding – which will then be listed on a public database. Return of capital to investors is a lengthy, complex and cumbersome process that typically requires you to obtain majority shareholder approval by way of a special resolution, notify ASIC and advertise in the press. There are restrictions on activities, such as adding, removing or varying classes of shares and the rights attached to them, which, at a minimum, will require careful examination of the Corporations Act 2001 and the relevant reporting requirements and compliance with any mandated time frame for implementation.

In contrast, unit trusts are not regulated in this way and changes, such as those listed above, can be made with relative ease.

In addition, income and capital gains made by a company are taxed at the company level whereas with a unit trust, the income and capital gains will generally flow through the trust and be taxed in the hands of the unit holders.

A unit trust that pools private capital raised from investors will likely be a Managed Investment Scheme[1] and may only require compliance with the licensing and fundraising requirements of the Corporations Act 2001.

[1] A “Managed Investment Scheme” is the legal term in the Corporations Act 2001 for an investment vehicle which is more commonly referred to as a “Fund” or a “Syndicate”. Generally speaking, all of these terms are interchangeable.