Buying for a Student Child in Australia: Co-Borrower and Trust Structures Explained

Introduction

Independent Australian — Parents with children studying at Australian universities often confront a housing market where on-campus accommodation is scarce and the median weekly rent for a one-bedroom unit in inner Sydney reached A$695 in the March quarter 2024, according to the REIA Real Estate Market Facts report. Buying a property for a student child can appear a rational alternative, but foreign-ownership restrictions, lending rules and tax architecture make the transaction far from straightforward. Two structures dominate Australian practice: the co-borrower approach, in which a parent appears on title and on the loan, and the trust structure, commonly a discretionary or fixed unit trust with a corporate trustee. This article sets out the lending parameters, the legal mechanics, the Foreign Investment Review Board (FIRB) obligations and the tax consequences that flow from each path, drawing on primary sources from the Reserve Bank of Australia (RBA), the Australian Prudential Regulation Authority (APRA), the Australian Taxation Office (ATO), FIRB and Treasury. It does not offer personal financial advice; every borrower’s circumstances require independent professional assessment.

The Co-Borrower Route: How Parents Can Be on the Loan and Title

A parent who is an Australian citizen or permanent resident can simply purchase a property jointly with the child, with both names on the certificate of title and on the mortgage. The parent’s income, Australian credit file and existing asset base support the serviceability assessment. The student child, who often has no Australian credit history and limited part-time earnings, becomes a co-borrower but not the primary income contributor. Lenders apply standard borrowing power calculations under APRA’s prudential practice guide APG 223, which requires a serviceability buffer of 3.0 per cent above the loan product rate for new residential lending. That buffer, re-confirmed by APRA in its October 2023 quarterly ADI statistics release, means a loan priced at 6.5 per cent per annum is assessed at 9.5 per cent. Where the parent earns foreign currency income, most lenders apply a haircut of 20–30 per cent to the gross income figure and restrict acceptable currencies to the US dollar, euro, British pound, Singapore dollar, Hong Kong dollar and New Zealand dollar. A further constraint is the debt-to-income (DTI) ratio: a number of Australian deposit-taking institutions now cap DTI at six times for owner-occupier loans originated through retail channels, matching internal risk limits that APRA monitors through its Quarterly Authorised Deposit-taking Institution Performance Statistics.

Co-borrowing avoids the FIRB application by placing an Australian parent on title, provided the parent is the predominant legal and beneficial owner. If the student child is an Australian resident, no foreign-acquisition duty surcharge applies. However, if the parent is a foreign person—i.e., not ordinarily resident in Australia and not holding a permanent visa—the transaction triggers a FIRB application and a stamp duty surcharge of 8.0 per cent in New South Wales (Duties Act 1997, s 104G) and 7.0 per cent in Victoria (Duties Act 2000, s 28), plus a land tax surcharge for foreign owners. These surcharges are calculated on the dutiable value of the property and paid at settlement. Lenders must see the FIRB approval letter before the loan advances. In practice, a parent on a temporary visa who co-borrows with a citizen child still needs FIRB approval unless a long-term exemption applies; the exemption for new dwellings purchased from a developer does not cover established residential property.

Trust Structures for Property Held on Behalf of a Student Child

When parents cannot or prefer not to be on title—perhaps because they wish to quarantine the asset from their personal estate, manage succession, or the child is the intended beneficial owner—the property may be acquired through a trust. Two forms predominate: a discretionary trust (family trust) with a corporate trustee, or a fixed unit trust where the parents hold the units and the child is a nominated beneficiary. A corporate trustee limits liability to the trustee company’s assets and permits continuity when directors change. The trustee applies for a residential investment loan in its capacity as trustee. Australian lenders require the trust deed to be reviewed by the bank’s legal team; approval time can stretch to six weeks. Lenders typically demand that the corporate trustee has no other operations, holds an active Australian Business Number (ABN) and is registered for GST if rental income exceeds the registration threshold of A$75,000 per annum. The loan will be priced at investment rates, which as of June 2024 sit roughly 25–35 basis points above equivalent owner-occupier rates, with tier-one variable rates for investor loans averaging 6.80–7.10 per cent per annum, according to RBA Indicator Lending Rates data (Statistical Tables F5).

For foreign parents, the trust route does not circumvent FIRB. A trust is a “foreign person” under the Foreign Acquisitions and Takeovers Act 1975 (Cth) if a foreign individual holds a substantial interest in the trust, defined as a beneficial interest of at least 20 per cent. Unless the trust obtains FIRB approval, it cannot acquire residential land. The application fee for a property valued above A$2 million but not exceeding A$3 million is A$28,200 (Foreign Acquisitions and Takeovers Fees Imposition Act 2015, schedule 1). The trust will also attract the foreign purchaser additional duty and foreign land tax surcharge in the state where the property is located. These imposts frequently make the trust structure less attractive where the ultimate controller is a foreign person.

FIRB Requirements and Stamp Duty Surcharges for Foreign Persons

The FIRB gateway is binary: either the acquirer is an Australian person and no approval is needed, or the acquirer is a foreign person and virtually every purchase of residential land requires approval. The Treasury’s FIRB Guidance Note 01, updated in November 2023, makes clear that a temporary resident may purchase one established dwelling to use as their principal place of residence, but must sell it within three months of it ceasing to be their principal place of residence. A student child on a subclass 500 visa qualifies as a temporary resident. If the child acquires alone, FIRB approval is needed and the stamp duty surcharge applies. If the parent is a foreign person and co-borrows, FIRB approval is needed even if the child is an Australian citizen, because the foreign parent acquires an interest in the land. The pathway with the lowest friction cost is where an Australian citizen or permanent resident parent acquires the property, with or without the child on title, and no foreign person holds any beneficial interest.

State surcharges are material: New South Wales levies 8.0 per cent surcharge purchaser duty on the dutiable value for residential land acquired by a foreign person, in addition to transfer duty (which can be 4.5–5.5 per cent on values above A$300,000). Victoria’s surcharge is 7.0 per cent, Queensland 7.0 per cent, and South Australia 7.0 per cent. For a A$900,000 apartment in Sydney purchased by a foreign person, the NSW surcharge alone is A$72,000. The surcharge land tax, calculated annually on the land value, adds a further drag. These costs must be capitalised into the purchase decision. Arrivau notes that some parents attempt to hold the property via a bare trust where the child is the sole beneficiary and the child applies for the loan, but Australian lenders will not lend to a bare trustee where the beneficial owner is a foreign student with limited income, because the borrower is the trustee and serviceability collapses.

Tax Implications: Land Tax, Income Tax and CGT under Trusts

The tax analysis starts with the nature of the trust, the residency of the trustee and the beneficiaries, and the application of the ATO’s views on disguised interest arrangements. Discretionary trusts that distribute net rental income to a student beneficiary may utilise the beneficiary’s tax-free threshold of A$18,200 (2023–24 income year). However, if the beneficiary is under 18, the unearned income of a minor is taxed at penalty rates under Division 6AA of the Income Tax Assessment Act 1936, with the first A$416 exempt and the balance taxed at 66 per cent until the trustee rate applies. This makes distribution to the parent beneficiary—usually on a higher marginal rate—more common. Fixed unit trusts avoid the minor penalty because unit holders are entitled to a fixed share of income and are assessed under ordinary provisions.

Land tax is assessed at state level. A discretionary trust in NSW is aggregated as if it were a single taxpayer; the land tax threshold does not apply (Land Tax Management Act 1956, s 3P). The trust pays land tax on the total land value above nil, with rates of 1.6 per cent up to A$5.2 million land value plus 2.0 per cent above that. In Victoria, trusts also lose the threshold, paying land tax from the first dollar at progressive rates. If the property is the student’s principal place of residence and they are on title, the principal place of residence exemption may apply, but a trust cannot claim this exemption in NSW or Victoria except in limited trusteeship arrangements for disabled persons. Therefore, a property held in a trust will generate an annual land tax liability that can exceed A$3,000–A$5,000 for a metropolitan unit.

Capital gains tax (CGT) is the next layer. An Australian resident individual who sells a dwelling that was the family’s main residence qualifies for the full CGT exemption. A trust cannot access the main residence exemption unless the dwelling is the main residence of a beneficiary with a disability, very narrow circumstances. A trust disposing of residential property pays CGT on the capital gain at the trust level if the gain is not distributed, or the gain flows through to beneficiaries. A foreign resident beneficiary is subject to withholding on the sale of Australian taxable property under the foreign resident capital gains withholding regime, with a 12.5 per cent withholding rate applied to the sale price unless a clearance certificate is obtained. ATO Taxpayer Alert TA 2021/1 flags arrangements where family trusts hold student accommodation with no commercial rental return and claims interest deductions; the ATO may challenge the nexus between the borrowing and income production if the property is rented below market rent to a family member.

Loan-to-Value Ratios, Serviceability and Debt-to-Income Constraints

An Australian owner-occupier purchase with a parent co-borrower on title can command a maximum loan-to-value ratio (LVR) of 95 per cent, inclusive of lenders mortgage insurance (LMI), though loans above 80 per cent LVR trigger LMI premiums that add A$10,000–A$20,000 to the upfront cost. Investment loans through a trust are typically capped at 80 per cent LVR with no LMI, or 90 per cent with LMI from a limited panel of lenders. APRA’s July 2023 statement on macroprudential settings reaffirmed that the interest rate serviceability buffer remains at 3.0 per cent, and that lenders must apply a floor rate of at least the product rate plus the buffer. The RBA cash rate at 4.35 per cent (as at August 2024) elevates the assessed rate to approximately 9.40 per cent for many new variable loans.

Foreign income adds complexity. Banks that accept foreign income limit it to a percentage, apply foreign exchange haircuts, and often require a larger deposit of 30–40 per cent. For a foreign parent borrowing in Australian dollars but earning in a non-accepted currency, the pool of lenders shrinks to one or two non-bank lenders that charge a risk premium of 150–200 basis points above standard variable rates. In addition, APRA’s statistical release for the March 2024 quarter shows that authorised deposit-taking institutions continue to tighten high-DTI flows, with new lending with a DTI of six or above declining to 8.2 per cent of new originations. Parents whose existing home-country mortgage commitments already push their global DTI above six will find serviceability a binding constraint. Lenders typically assess global debt on a net-income basis, converting foreign obligations at the prevailing exchange rate.

Risks and Mitigations: From Exchange Rate to Renovation Costs

Currency risk is the most underestimated variable. A parent servicing a loan in Australian dollars while earning income in Singapore dollars or renminbi faces margin calls in the form of increased servicing shortfalls if the exchange rate moves adversely. Between January 2021 and October 2023, the Australian dollar appreciated by 18 per cent against the Japanese yen and 12 per cent against the US dollar at its peak, squeezing the Australian-dollar value of foreign income. Forward hedging is prohibitively expensive for retail clients; the practical mitigation is a higher cash buffer held in an Australian offset account that reduces the effective interest charge and absorb payment shocks.

Vacancy risk arises when the student finishes university or returns home for the summer break. The assumption of continuous rental income to service the loan should be stress-tested. If the property is let to the student child at market rent, the trust generates assessable income but the parent cannot also claim the main residence exemption because the property is an investment asset. If the child pays below-market rent, the ATO may limit deductions on a reasonable basis and argue the trust is non-commercial. Further, state revenue offices scrutinise trust-held residential land closely, and some, like the Victorian State Revenue Office, issue land tax assessments assuming the trust is a foreign trust unless the trustee can prove otherwise. The compliance burden is therefore continuous.

Maintenance costs, strata levies, council rates and water charges should be modelled over a minimum five-year holding period. Arrivau’s analysis of median strata levies in Sydney apartments shows an annual cost of A$5,000–A$7,000, an expense that consumes about 2.5–3.5 per cent of the median weekly rent. These outlays are tax deductible only if the property is genuinely available for rent, highlighting the importance of arm’s-length leasing arrangements.

Conclusion and Disclaimer

Buying for a student child in Australia can be executed through a co-borrower structure with an Australian parent on title, or—less commonly—through a trust. The co-borrower path offers the simplest regulatory and tax treatment, provided at least one borrower is an Australian citizen or permanent resident and the property is used as the child’s principal place of residence. The trust path adds legal cost, FIRB complications and a material land tax penalty, and seldom provides a superior outcome unless the parents require asset segregation for estate planning reasons that cannot be achieved via co-ownership. In all cases, the figures on stamp duty surcharges, land tax, serviceability buffers and LVR caps must be loaded into a cash-flow model before a contract is signed. The data cited herein is current as of mid-2024 and drawn from RBA Statistical Tables, APRA quarterly statistics, FIRB Guidance Note 01 and the relevant state revenue legislation.

Information only, not personal financial advice. Consult a licensed mortgage broker.