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What is a unit trust? A trust entity holds the commercial property while investors hold units (similar to shares in a company), with income distributed according to unit holdings.
What are tenants in common? Direct property co-ownership where each investor owns a defined percentage share of the property itself.
Key difference? Unit trusts provide flexibility for unequal distributions and easier investor changes; tenants in common offers simplicity with proportional ownership and income.
Main consideration: Whether your investment needs the flexibility that justifies trust complexity, or whether direct ownership provides everything you require.
Before committing to either structure, consider how many investors are involved and whether capital contributions are equal. If you have 4+ investors with complex capital arrangements or anticipate needing flexible income distribution, unit trust structure may provide value through operational flexibility. For 2-3 investors with equal or simple contributions, tenants in common typically offers sufficient flexibility without ongoing trust compliance. Discuss both options with your solicitor before exchanging contracts - changing structure after purchase involves additional stamp duty and complexity. Consider bank financing preferences early, as some lenders have stronger appetite for direct ownership structures.
You and three business partners are pooling capital to purchase a $3.2M commercial property. Someone's accountant mentions "unit trust structure" while your solicitor talks about "tenants in common." Both claim their approach is better. You're uncertain which structure actually suits your investment - and whether the added complexity of a trust creates value or just additional compliance burden.
The choice between unit trust and direct co-ownership affects tax treatment, operational flexibility, and how easily investors can enter or exit. More importantly, the right structure depends on your specific circumstances: number of investors, capital contribution equality, income distribution needs, and future plans.
Having worked in property development before practicing law](link to About page), I've structured investments using both approaches and understand when complexity adds value versus when simpler co-ownership provides everything investors need. Here's how to assess which structure suits your investment.
The structure choice typically surfaces when business partners, family groups, or investor syndicates combine capital for commercial property purchase. You're moving beyond single-owner investment into group ownership, which requires clear framework for how the investment operates.
This decision matters most when:
The structure you choose affects everything from tax treatment to how easily you can add or remove investors. Getting this right from the start prevents costly restructuring later - changing from tenants in common to unit trust after property purchase involves additional stamp duty and complexity.
A unit trust creates a separate legal entity (the trust) that holds the commercial property. Investors don't own the property directly - they hold units in the trust, similar to holding shares in a company. A trustee (typically a company) holds legal title and manages the property according to the trust deed.
Income from the property flows through the trust to unit holders based on their unit holdings. This creates flexibility because the trust deed can allow distributions that don't exactly match unit ownership percentages (within taxation rules). The trustee makes decisions about property management, though major decisions typically require unit holder approval.
When an investor wants to exit, they transfer their units to another party rather than transferring property ownership. This can simplify investor changes, though unit transfers still require documentation and may trigger stamp duty depending on structure.
Tenants in common means each investor owns a defined percentage share of the property directly. If four investors each contribute equally, each owns 25% of the property itself. All names appear on the Certificate of Title, and all owners must consent to major decisions about the property.
Income from the property flows directly to owners in proportion to their ownership shares. If you own 30% of the property, you receive 30% of the rental income and can claim 30% of expenses for tax purposes. This proportional treatment is straightforward but inflexible - you can't easily vary distribution percentages.
When an investor wants to exit, they transfer their percentage ownership of the property itself to another party. This involves property transfer documentation and potentially stamp duty, making investor changes more complex than unit transfers in some circumstances.
Unit trusts provide flexibility in income distribution that tenants in common cannot match. The trust deed can allow distributions that differ from unit ownership (within tax rules about present entitlement). This matters when investors have different tax positions - perhaps one investor wants maximum distribution for retirement income while another prefers retained earnings for capital growth.
Tenants in common requires proportional treatment. Your income and expense allocation must match your ownership percentage. This simplicity suits many investments, but creates inflexibility when investors' needs diverge.
Negative gearing operates differently under each structure. With tenants in common, each owner claims their proportional share of losses against other income. With unit trusts, loss treatment depends on trust type and tax position - this requires professional tax advice specific to your circumstances.
Capital gains tax treatment has nuances under each structure. Both can access CGT discounts, but the mechanism differs. Unit trusts involve additional complexity around trust capital gains and distribution to unit holders. Land tax aggregation in NSW also has specific rules affecting trust structures that may not apply to direct ownership.
Adding or removing investors differs significantly between structures. Unit trusts allow investor changes through unit transfers without touching property title. Tenants in common requires property transfer documentation, registration, and potentially stamp duty each time an investor changes.
This flexibility matters most when you anticipate:
Unequal capital contributions work naturally in unit trust structures - you simply issue units proportional to each investor's contribution. With tenants in common, unequal contributions require careful documentation about what ownership percentages mean versus capital contribution records. This creates complexity around profit distribution and exit settlements.
Decision-making mechanisms need clear documentation under both structures. Unit trusts typically vest day-to-day management authority in the trustee, with major decisions requiring unit holder approval. Tenants in common requires consensus among all owners for major decisions unless your co-ownership agreement specifies different voting arrangements.
Unit trust structure creates separation between property ownership (held by trustee) and beneficial interest (held by unit holders). This can provide asset protection benefits depending on trustee structure and your specific circumstances. Professional advice considers whether these benefits justify the additional complexity for your situation.
Tenants in common means direct personal ownership. Your property interest forms part of your personal asset pool, affecting family law property division, creditor claims, and estate distribution. For some investors, this simplicity is appropriate. For others - particularly those with professional liability exposure - the separation that trusts provide matters significantly.
Neither structure provides bulletproof asset protection. Both require proper establishment and operation to achieve intended outcomes. The question is whether the protection unit trusts offer justifies the compliance and operational complexity for your circumstances.
Lenders have different appetites for unit trust versus direct ownership structures. Some banks prefer direct ownership for simpler security documentation and enforcement. Others work readily with unit trust structures but require additional documentation about trust terms and trustee obligations.
This affects both initial financing approval and potential refinancing flexibility later. Understanding bank attitudes in your market matters when choosing structure. Your mortgage broker or banker can provide guidance about which structure creates smoother financing approval for your specific investment and lender relationships.
Unit trust complexity adds value when your investment has these characteristics:
4+ investors with complex capital arrangements - The flexibility to issue different unit classes or allow non-proportional distributions justifies the compliance burden when investor needs diverge significantly.
Unequal capital contributions requiring flexible profit distribution - If one investor contributes 40% of capital but another needs higher current income distribution due to their tax position, unit trust structure accommodates this. Tenants in common would force proportional distribution matching ownership shares.
Investors with significantly different income or tax positions - Retirees wanting maximum distribution, working professionals happy with retained earnings, or investors with different marginal tax rates all benefit from distribution flexibility that unit trusts provide.
Anticipating future investor changes - If you're planning estate planning succession, bringing in additional capital later, or expect investors to exit over time, unit transfers are typically simpler than property ownership transfers.
Asset protection priorities - Professional liability exposure, business risk concerns, or family law considerations may make the separation between property ownership and beneficial interest valuable for your circumstances.
Direct co-ownership works well when your investment has these characteristics:
2-3 investors with equal or simple capital arrangements - The administrative burden of trust structures isn't justified when ownership and distribution can be proportional and straightforward.
Proportional profit distribution matching ownership shares - If each investor's income needs align with their capital contribution and ownership percentage, you don't need distribution flexibility that unit trusts provide.
Preference for simplicity and lower ongoing compliance - Tenants in common involves simpler ongoing administration, no annual trust tax returns, and fewer compliance touchpoints. For many investors, this simplicity is valuable.
Less frequent anticipated investor changes - If the investor group is stable and you don't anticipate regular capital raising or investor exits, the transfer simplicity that unit trusts provide matters less.
Bank financing priority - If your preferred lender has stronger appetite for direct ownership structures, this operational consideration may outweigh other factors favouring trust structures.
The question isn't which structure is objectively "better" - it's which structure matches your investment's actual complexity and flexibility needs. A unit trust for two equal investors might create unnecessary compliance burden. Tenants in common for five investors with complex capital arrangements and estate planning needs might prove operationally difficult.
Most investors find that structure assessment creates better outcomes by matching complexity to needs rather than defaulting to "what everyone uses" or choosing based solely on potential tax advantages without considering operational implications.
You're uncertain which structure suits your investment. You've received conflicting advice - your accountant favours unit trust for tax flexibility, while your solicitor suggests tenants in common for simplicity. You're worried about choosing wrong and being locked into a structure that creates problems or costs more to change later.
You don't fully understand what operational differences you'll experience under each structure, or whether the complexity of a trust is justified for your specific investor group and capital arrangements. You're concerned about making this decision without understanding all implications - tax treatment, investor changes, bank financing, ongoing compliance requirements.
You want confidence that you're choosing the structure that actually makes sense for how your investment will operate, not just accepting whichever option someone recommends first.
Consider two different commercial property investments to see how investor circumstances affect structure choice:
Scenario A - Simple Investment:Two business partners with equal 50/50 capital contributions purchase a $2M commercial property. They want proportional income distribution matching their ownership. Both expect to hold the investment long-term with no anticipated investor changes. They value operational simplicity.
For this investment, tenants in common provides everything needed. Each owns 50% of the property, receives 50% of income, claims 50% of expenses. No distribution flexibility required. Simple ongoing administration. Structure matches investment reality.
Scenario B - Complex Investment:Four investors contribute $1.2M, $800K, $700K, and $300K toward a $3M commercial property. The $300K investor is a retiree wanting maximum current income. The $1.2M investor wants retained earnings for capital growth and has high marginal tax rate. They're planning to bring in a fifth investor for property improvements in 18 months. One investor wants estate planning flexibility for passing investment to adult children.
For this investment, unit trust structure provides value through:
The additional compliance and setup complexity is justified because the investment actually needs the flexibility that unit trust structure provides.
You have clear understanding of which structure suits your investment based on actual investor number, capital arrangements, distribution needs, and future flexibility requirements. You're not guessing about whether trust complexity adds value or just creates unnecessary compliance burden.
The chosen structure is properly established with clear documentation about investor rights, decision-making authority, and how changes are handled. You understand what ongoing compliance looks like and how investor changes will work if needed. Your investment structure matches your operational reality rather than being over-complicated or insufficiently flexible.
Bank financing is arranged appropriately for your chosen structure. If you've selected unit trust, the trust deed and unit holder agreements create the flexibility you actually need. If you've chosen tenants in common, your co-ownership agreement addresses decision-making and potential future changes clearly.
Most importantly, you have confidence that structure choice supports your investment goals rather than creating obstacles. You're not discovering three years later that you chose the wrong structure and face costly restructuring to accommodate changes you should have anticipated.
Before we work together:You're uncertain which structure suits your investment. You've received conflicting advice about unit trusts versus tenants in common and don't fully understand what operational differences you'll actually experience under each structure.
What we do together:We assess your specific circumstances - investor number, capital contribution equality, distribution needs, anticipated future changes, and financing requirements. I explain how each structure works in practice for your particular investment, not just technical differences. We consider both legal and commercial factors to identify which structure provides the flexibility you need without unnecessary complexity.
The structure is then established properly with clear documentation about investor rights and obligations. For unit trusts, this involves trust deed preparation and unit holder agreements. For tenants in common, this involves co-ownership agreements addressing decision-making and future changes.
After we work together:You have investment structure matched to your actual needs and circumstances. You understand how the structure operates, what compliance is required, and how investor changes are handled if needed. You're not locked into a structure that proves too simple or unnecessarily complex as your investment evolves.
Timeline: Structure assessment and establishment typically takes 3-4 weeks from decision through to property settlement readiness.
Investment: Every investment situation is different based on investor number, complexity, and financing arrangements. A consultation clarifies what's involved in your specific circumstances and the investment required. Most investors find that proper structure choice creates value worth significantly more than the professional investment by matching complexity to actual needs.
Get advice before committing to purchase if:
Follow up if:
Contact us for commercial property investment structure guidance specific to your circumstances.
No, it depends on your circumstances. Unit trusts provide flexibility for complex investor arrangements, unequal capital contributions, or anticipated investor changes. For 2-3 investors with equal contributions and proportional distribution needs, tenants in common typically provides sufficient flexibility without the complexity. Professional assessment considers your specific investor makeup and needs to recommend the structure that matches your investment requirements.
Yes, but it involves additional stamp duty and complexity. The property must be transferred from individual owners to the trust, triggering a dutiable transaction. This is why structure choice matters before purchase - changing later costs more than choosing appropriately from the start. If your circumstances change significantly after purchase, professional advice can assess whether restructuring provides sufficient value to justify the additional cost.
Some lenders prefer direct ownership (tenants in common) for simpler security documentation. Others work readily with unit trust structures but require additional documentation about trust terms and trustee obligations. Financing attitudes vary by lender and loan size. Your mortgage broker or banker should be involved early in structure discussions to ensure your chosen structure aligns with financing approval expectations.
Unit trusts require annual trust tax returns, maintenance of trust accounts and records, and trustee compliance with trust deed terms. The trustee (typically a company) has its own compliance requirements. Ongoing accounting and potentially legal support is needed to ensure proper operation. Tenants in common is simpler - standard property ownership with individual tax returns. Professional guidance helps you understand what ongoing compliance actually looks like before committing to either structure.
Potentially, but it depends on specific circumstances and proper structure establishment. Unit trusts create separation between property ownership (held by trustee) and beneficial interest (held by unit holders), which can provide protection depending on your situation. However, improperly structured or operated trusts may not achieve intended protection. Both structures require professional advice specific to your asset protection needs rather than assuming unit trust automatically provides better outcomes.
Unit trusts typically provide more flexibility for estate planning and succession. Units can be transferred to beneficiaries more easily than property ownership transfers. Trust structures allow for staged succession planning and can accommodate complex family arrangements. However, this flexibility comes with ongoing trust compliance requirements. Tenants in common interests pass through your estate like other assets - simpler but potentially less flexible. Your estate planning objectives should inform structure choice alongside other investment considerations.
