Trust structures for property investors

Discretionary family trusts, fixed trusts, and unit trusts are common structures for Australian property investors. Each has specific tax and asset-protection characteristics. The wrong structure for your profile costs more than it saves; the right one creates meaningful flexibility.

The three common structures

1. Discretionary (family) trust

• Trustee makes annual distributions to beneficiaries at discretion
• Income can be split among family members at low marginal rates
• Strong asset protection (the trust, not you, owns the property)
• Land tax treatment worse in most states (special/trust rates)
• Loans typically more expensive and harder to obtain
• CGT discount available to individual beneficiaries

2. Fixed trust

• Beneficiaries have fixed entitlements
• Land tax often treated more like individual ownership (accesses threshold in NSW)
• Income allocation fixed (can’t redirect year-to-year)
• Less flexibility but generally clearer tax treatment

3. Unit trust

• Beneficiaries hold units (like shares); income distributed proportionally
• Common for multi-party property ventures (siblings pooling capital, friends investing together)
• Units can be redeemed for cash (subject to unit pricing)
• CGT treatment depends on nature of trust

The negative gearing catch

Losses in a discretionary trust cannot flow through to beneficiaries. They are trapped in the trust, carried forward to offset future trust income. For a negatively geared property, this means:

• The $20k annual loss can’t offset your salary
• The loss sits in the trust until the property turns positive or is sold
• The CGT on eventual sale uses the loss at that point

Upshot: negative gearing via discretionary trust is usually worse than personal ownership for a single investor. The tax benefit is deferred, sometimes by 10+ years.

The positive gearing advantage

For positively geared properties, a discretionary trust can distribute income to low-income family members, substantially reducing the effective tax rate on the rental surplus. Example: $20k of positive net income distributed to a non-working spouse or adult child at 19% marginal rate saves roughly $3,600/year in tax vs distribution to you at 37%.

The CGT consideration

CGT discount (50% on assets held 12+ months) flows through to individual beneficiaries of a discretionary trust. So on sale, the capital gain passes through to the beneficiary and they apply the 50% discount at their marginal rate.

However, trusts themselves cannot use the 50% CGT discount directly. Beneficiaries must be individuals (or another trust) to access it. Corporate beneficiaries of a trust do not receive the discount.

The lending reality

Lending to trusts is materially harder than to individuals:

• Fewer lenders participate (especially for discretionary trusts)
• Interest rates 10-30 bps higher on average
• Requires personal guarantees from the trustee and usually the controlling individual
• Serviceability can be assessed on trust income, beneficiary income, or both

For investors still building the portfolio, simplicity often wins. Trusts make sense for the 3rd, 4th, 5th property - not the first or second.

Land tax consequences

Quick state summary:

• NSW: discretionary trusts get no land tax threshold unless structured as “fixed trust” with precise documentation
• VIC: trusts attract special surcharge rates
• QLD: higher rates on trust-held property
• WA, SA: trusts treated more conventionally

The land tax penalty in a trust can be $5k-$15k/year more than individual ownership, on a modest portfolio.

Asset protection

The strongest argument for a discretionary trust is asset protection. If you are a high-liability professional (medical, legal, executive) who may face claims, property held in a trust is generally more protected than property in your personal name.

For lower-liability professions, the asset protection value is smaller. It may not justify the land tax and lending costs.

When to use a trust

• You’re a high-liability professional wanting asset protection
• You have 3+ properties and income is high enough to benefit from distribution to family
• You’ve discussed the full framework with a property-tax accountant
• You understand trust law enough to distinguish marketing from substance

When not to

• You’re buying your first or second investment property
• You’re negatively geared at a top marginal rate
• Your family circumstances don’t support income distribution (single, or single-income)
• You’re uncomfortable with the ongoing compliance (annual tax return, trustee resolutions, ATO reporting)