Purchasing Property Through a Discretionary Trust: Pros and Cons in Australia
- johnry8
- 5 days ago
- 4 min read
Buying a commercial or investment property through a discretionary trust (also known as a family trust) is a commonly used strategy in Australia. This structure can provide genuine advantages in areas such as asset protection, tax management and estate planning.
However, while the flexibility of a discretionary trust appeals to many investors, it is not without its complexities. From land tax surcharges to borrowing restrictions and ongoing compliance, there are several practical and financial factors to consider before using a trust to hold property.
If you are planning to expand your property portfolio or wish to safeguard family wealth, understanding how a discretionary trust works, can help you decide whether it supports your long term financial goals.
What Is a Discretionary Trust?
A discretionary trust is a legal structure where a trustee (either an individual or a company) holds assets such as property for the benefit of nominated beneficiaries. The trustee has the discretion to decide how income or capital is distributed among those beneficiaries each year.
This arrangement allows flexibility in distributing profits and can assist with tax planning. The trust, rather than an individual, legally owns the property, providing a degree of separation that may protect assets from personal liabilities.
Why Investors Use a Discretionary Trust for Property
Many investors choose this structure for several reasons, most notably tax flexibility, asset protection and estate planning benefits.
a. Income Tax Flexibility
A discretionary trust allows income from rent or other sources to be distributed among beneficiaries in a tax effective manner. For example, income can be allocated to family members in lower tax brackets, potentially reducing the overall tax payable.
This flexibility allows the trustee to adapt distributions each financial year based on who in the family can receive income most efficiently. However, distributions to minors are generally taxed at penalty rates, so adult beneficiaries usually benefit most.
b. Capital Gains Tax Discount
If the property is held for more than twelve months, the trust may qualify for the 50% capital gains tax (CGT) discount. This discount can also be passed on to individual beneficiaries where the trust deed allows it, helping to manage tax more efficiently when a property is sold.
Unlike companies, which do not receive this CGT discount, discretionary trusts offer an advantage for long term property investors.
c. Asset Protection
Because assets in a trust are legally owned by the trustee, they are generally protected if a beneficiary faces personal financial or legal issues. This separation can shield family assets from creditors, provided the trust is properly structured and operated.
Using a corporate trustee can further limit liability, as any debts of the trust are typically confined to trust assets. That said, personal guarantees for loans can still expose individuals to risk, so professional guidance is essential.
d. Estate Planning and Succession
Discretionary trusts are often used for intergenerational wealth planning. Assets held within the trust do not form part of a deceased person’s estate, which allows for a smooth transition of control to the next generation without triggering probate or additional taxes in most cases.
A new trustee or appointor can take control of the trust when required, ensuring continuity of ownership and simplifying succession.
e. Land Tax Opportunities in Queensland
Queensland’s land tax threshold (in 2026) for trusts will increase to $350,000. For some property owners who have already exceeded their personal threshold, this may present an opportunity to manage land tax more strategically.
Key Drawbacks and Risks to Consider
While the potential benefits of using a discretionary trust are appealing, there are several disadvantages that may outweigh the advantages depending on your circumstances.
a. No Immediate Negative Gearing Offset (Delayed Benefit)
Losses from negatively geared properties cannot be distributed to beneficiaries to offset their personal taxable income. These losses remain within the trust and can only be used to offset future profits from the same trust. For investors relying on immediate tax deductions, this can limit short term tax benefits.
b. Higher Land Tax and Surcharges
Trusts are often subject to less favourable land tax rules. In New South Wales, trusts generally receive no land tax threshold, meaning tax applies from the first dollar of land value. In Queensland, the trust threshold is lower ($350,000 from 2026), and in Victoria, most trust held properties are taxed from around $25,000 in land value.
These rules can significantly increase holding costs. Additionally, if a trust deed allows foreign beneficiaries, extra stamp duty and land tax surcharges may apply unless the deed explicitly excludes them.
c. Financing Challenges
Borrowing through a trust can be more complex. Lenders usually require personal guarantees from trustees or directors, which reduces the asset protection benefit. Loan documentation is often more detailed, and fewer banks offer competitive lending options for trusts.
You may also miss out on first home buyer grants or concessions, as these are not available when purchasing through a trust.
d. No Main Residence CGT Exemption
Trusts cannot access the capital gains tax exemption for a main residence. If a trust owned property is later used as a home, any sale would still attract CGT. This makes trusts suitable for investment or commercial properties only, not for homes you plan to live in.
e. Additional Tax Return to be Prepared
Operating a discretionary trust requires annual tax returns, trustee resolutions and accurate record keeping. Failure to properly distribute income by 30 June each year can result in the ATO taxing all income at the highest marginal rate.
There are also legal setup costs, potential ASIC fees (if a corporate trustee is used) and annual accounting fees. Over time, these can outweigh the benefits for smaller investors.
Best Practices for Setting Up and Managing a Trust
To use a discretionary trust effectively for property ownership:
Obtain professional advice from both your accountant and solicitor before setup to ensure the trust deed aligns with your goals.
Understand the state tax implications, especially land tax and foreign surcharge rules.
Keep detailed records of all trust transactions and resolutions.
Review your trust annually to ensure it remains compliant and tax effective.
Plan for the long term. Trusts are most beneficial for those with intergenerational or long hold investment goals.
How can Rise Accountants Help?
If you are considering purchasing a property through a discretionary trust, Rise Accountants can help you evaluate whether this structure suits your investment and tax objectives.