A unit trust is a trust in which the trust property is divided into a number of defined shares called units. The beneficiaries subscribe for the units in much the same way as shareholders in a company subscribe for shares. The assets of the trust are held by the trustee on trust for the unit holders, who generally are entitled to the capital and income of the trust fund in proportion to their holding of units.

A non-geared unit trust is basically identical to an ordinary unit trust, apart from certain limitations as set out below. It may be considered by trustees of self-managed superannuation funds (SMSFs) wanting to invest in a related unit trust, such as, the unit trust…:

• has no borrowings or loans;
• does not have any investments in any other entity;
• does not have a charge (e.g. mortgage) over any of its assets;
• does not own any assets that were acquired from a related party, or were previously owned by a related party, of the fund (except business real property);
• has not entered into a lease agreement with a related party of the fund (unless the lease is legally binding and relates to business real property); and
• has not made a loan or provided any other form of financial assistance to a related party of the fund.

These entities are commonly known as ‘non-geared’ unit trusts, due to the requirement that such trusts are not permitted to have any borrowings or other charges on their assets (i.e. ‘gearing’) if the related SMSF is to continue to enjoy the benefit of having the investment excluded from being an in-house asset.