What Is a Unit Trust and How Is It Taxed?

A unit trust is an investment structure where multiple investors pool money by purchasing units. Each unit represents a share of the trust's net assets. Common examples include managed funds, exchange-traded funds (ETFs), real estate investment trusts (A-REITs), and listed investment companies structured as trusts.

Unit trusts are "flow-through" entities for tax purposes. This means the trust does not pay income tax on its earnings. Instead, the income and capital gains are attributed to unitholders based on their proportionate ownership. Each year, the trust issues a tax statement showing your share of the trust's net income broken down into different components.

The Attribution Managed Investment Trust (AMIT) regime has been the standard tax framework for most unit trusts since 2016. It replaced the former trust streaming rules with a clearer framework that gives trust managers more flexibility to attribute income to different classes of unitholders. Use our income tax calculator to see how trust distributions affect your overall tax position.

Unit Trust Distribution Components and Tax Rates

Trust distributions are not a single income type. They are broken down into several components, each with different tax treatment. Understanding these components is essential for accurate tax reporting and avoiding unexpected tax bills.

How the AMIT Regime Affects Your Tax

The Attribution Managed Investment Trust (AMIT) regime changed how unit trust income is reported and taxed. Under AMIT, the trustee attributes income to unitholders at the end of the financial year. The attribution is binding — once made, it cannot be changed. This gives investors certainty about their tax position.

Under AMIT, trust distributions are typically attributed on a "fixed trust" basis. This means unitholders receive a proportionate share of each income component based on their unit holdings. The trustee provides an annual AMIT Member Annual (AMA) statement that breaks down each component in detail.

One key advantage of AMIT is the ability for trustees to stream different income types to different classes of unitholders. This is particularly useful for wholesale funds with institutional and retail classes. However for most retail investors, the attribution is proportional and straightforward. If you need to estimate your overall tax liability including trust income, try our take-home pay calculator.

Capital Gains Tax When Selling Unit Trust Units

When you sell or redeem your units in a unit trust, you trigger a capital gains tax (CGT) event. The capital gain or loss is calculated as the difference between your sale price and your cost base. Your cost base includes the purchase price plus any incidental costs like brokerage and stamp duty.

If you held your units for more than 12 months, you qualify for the 50% CGT discount. This means only half of the capital gain is included in your assessable income. For example, if you made a $10,000 capital gain on units held for 18 months, only $5,000 is added to your taxable income. The discount applies to Australian resident individual investors, not to companies.

Tax-deferred distributions complicate the cost base calculation. These distributions are not taxed when received, but they reduce your cost base for CGT purposes. If your cost base drops below zero, the excess is treated as a capital gain at that point. This is common with property trusts that distribute depreciation benefits to unitholders.

Franking Credits on Unit Trust Distributions

Many Australian unit trusts invest in shares that pay franked dividends. When the trust receives these dividends, the franking credits flow through to you as a unitholder. Your annual tax statement will show the amount of franking credits attached to your distribution.

Franking credits reduce your tax liability dollar-for-dollar. If your marginal tax rate is lower than the corporate tax rate (25% for large companies, 27.5% for small businesses, or 30% for some entities), you may receive a refund for excess franking credits. If your marginal rate is higher, you pay the difference.

For example, if you receive a $700 distribution with $300 of franking credits attached, your assessable income is $1,000 ($700 + $300). If your marginal rate is 30%, you owe $300 in tax on this amount. The $300 franking credits fully offset this, leaving you with no additional tax. If your marginal rate is 16%, you owe $160 and receive a $140 refund.

Tax-Deferred and Tax-Free Distributions

Some unit trusts, particularly property and infrastructure trusts, pay distributions that include tax-deferred and tax-free components. Tax-deferred distributions usually arise from depreciation and capital allowances. They are not taxed in the year received, but they reduce your cost base, meaning you will pay more CGT when you sell your units.

Tax-free distributions are rare but can occur when a trust returns capital to unitholders. They are not assessable and do not affect your cost base. The trust's annual statement clearly labels these components so you can report them correctly on your tax return.

Tracking your cost base adjustments is important because they accumulate over time. If you hold units for many years and receive significant tax-deferred distributions, your cost base can reduce substantially, leading to a larger capital gain on disposal. Keep all annual tax statements for this reason. Our superannuation calculator can help you compare the tax effectiveness of different investment structures.

Foreign Unit Trust Investments

Many unit trusts invest in international markets. When this happens, the distributions include foreign income components. You may be entitled to foreign tax credits for taxes paid in other countries. The trust's tax statement shows the foreign income component and the amount of foreign tax paid.

Foreign income is included in your assessable income at the gross amount (before foreign tax). You then claim a foreign tax credit for the tax paid overseas. This prevents double taxation. If foreign tax credits exceed your Australian tax on that income, the excess is generally not refundable but can offset other tax liabilities.

Passive foreign investment company (PFIC) rules may apply to certain offshore funds, but these are uncommon for mainstream Australian unit trusts investing internationally. The AMIT regime generally handles foreign income attribution appropriately for most unitholders.

How to Report Unit Trust Income on Your Tax Return

When lodging your tax return, you report unit trust income in two main sections. Trust distributions go under "Partnerships and trusts" income. You enter the total assessable distribution amount and break down the components if required. Most taxpayers using myTax simply enter the total amount from their AMIT statement.

Capital gains from selling units are reported separately in the "Capital gains" section. You need to calculate your capital gain or loss for each sale. If you qualify for the 50% CGT discount, you apply it here. The ATO matches transactions reported by share registries and brokers, so accuracy is essential.

Franking credits are reported in the "Dividends" section even though they come via a trust. Foreign tax credits are reported separately. If you use a tax agent, they will typically handle all component breakdowns based on your trust tax statements. Our Medicare levy guide explains how the 2% Medicare levy applies to all taxable income including trust distributions.

Frequently Asked Questions

Do unit trusts pay tax in Australia?

No, unit trusts generally do not pay income tax. They are "flow-through" entities that attribute income to unitholders, who pay tax at their individual marginal rates. The trust lodges a trust tax return for information purposes but does not pay tax on distributed income.

How are unit trust distributions taxed?

Distributions consist of several components including dividends, interest, capital gains, and franking credits. Each component is taxed differently. Dividends and interest are taxed at your marginal rate. Capital gains from the trust's trading activity may qualify for the 50% CGT discount. Franking credits offset your tax liability.

What is the difference between a unit trust and a managed fund?

A unit trust is a legal structure, while a managed fund is a type of investment vehicle that can be structured as a unit trust. Most Australian managed funds and ETFs operate as unit trusts under the AMIT regime. The terms are often used interchangeably when discussing investment taxation.

Do I pay CGT when switching between funds within a platform?

Yes, switching between funds on an investment platform is generally a CGT event. You are disposing of your units in one fund and acquiring units in another, even if you do not physically receive the cash. Any capital gain or loss must be calculated and reported.

Can I use the 50% CGT discount when selling unit trust investments?

Yes, if you are an Australian resident individual and have held the units for more than 12 months, you qualify for the 50% CGT discount. Only half the capital gain is included in your assessable income. Companies do not qualify for the discount.

What happens if I reinvest my distributions instead of receiving cash?

Dividend reinvestment plans (DRPs) and distribution reinvestment plans do not change your tax liability. You are still treated as having received the distribution, and you must pay tax on it. The reinvested amount increases your cost base for CGT purposes when you eventually sell the additional units.