Many Australian property investors consider purchasing investment property through a trust structure — typically a family (discretionary) trust or a unit trust. Trusts can offer significant advantages: asset protection (the property is owned by the trust, not you personally), income distribution flexibility (directing rental income to lower-tax beneficiaries), and estate planning benefits. However, trusts also introduce complexity: lending is more restrictive, negative gearing benefits are limited, land tax surcharges may apply, and the setup and ongoing administration costs are not trivial. This guide explains the key considerations.
Family Trusts vs Unit Trusts: Which Structure for Property Investment?
Family (Discretionary) Trust:
A family trust is the most common trust structure used by Australian investors. The trustee (usually a company) holds the property on behalf of the beneficiaries (typically family members). The trustee has 'discretion' to distribute income (and capital) among the beneficiaries in whatever proportions they choose each year — enabling income splitting and tax minimisation.
How income distribution works: If the trust earns $50,000 in net rental income, the trustee can distribute $25,000 to the higher-earning spouse (taxed at their marginal rate) and $25,000 to a lower-earning family member or adult child (taxed at their lower marginal rate — or tax-free if within the tax-free threshold). This flexibility is the primary tax advantage of a family trust.
Asset protection: Because the property is owned by the trust (not by you personally), it is generally protected from personal creditors, bankruptcy, or legal claims against individual beneficiaries. This is particularly valuable for professionals in high-liability occupations (doctors, builders, company directors).
Unit Trust:
A unit trust is similar to a family trust, but ownership is divided into fixed 'units' (like shares in a company). Each unit holder owns a defined percentage of the trust — and income and capital are distributed in proportion to unit holdings. Unit trusts do not have the discretionary distribution flexibility of a family trust.
When to use a unit trust: Unit trusts are typically used when unrelated parties (friends, business partners) invest together, or when a specific ownership split is required for legal or tax reasons. Unit trusts also allow negative gearing (see below), which family trusts generally do not.
Hybrid Trust:
Some structures combine elements of both — offering discretionary distribution of income with fixed unit-based capital entitlements. These are more complex and require specialist legal and tax advice.
Setup and administration costs: Establishing a trust costs $1,500–$4,000 (legal fees for the trust deed and trustee company setup). Annual costs include: tax return preparation for the trust ($1,000–$3,000), ASIC annual review fee for the trustee company ($310), and any accounting and compliance fees. Total ongoing costs are typically $2,000–$5,000 per year.
Family Trust = Flexible Distribution; Unit Trust = Fixed Ownership
A family trust lets the trustee distribute income to any beneficiary in any proportion each year — maximising tax efficiency. A unit trust distributes income in fixed proportions based on unit holdings — providing certainty for co-investors. Choose based on your structure needs: family wealth building (family trust) or co-investment with defined shares (unit trust).
Tax Benefits and Key Restrictions for Trust-Owned Property
Tax benefits:
Income splitting: The primary benefit. A family trust can distribute rental income to beneficiaries with lower marginal tax rates — including adult children, retired parents, or a spouse not in the workforce. A net rental income of $40,000 distributed to a beneficiary with no other income attracts approximately $4,500 in tax (including Medicare). The same income earned personally by a high-income earner at a 39% marginal rate attracts approximately $15,600 in tax. The trust saves approximately $11,100 in tax per year.
Asset protection: Trust-held property is generally protected from personal lawsuits, bankruptcy, and creditors of individual beneficiaries. This is a significant non-tax benefit for professionals and business owners.
CGT discount: Trusts are entitled to the 50% CGT discount on assets held for more than 12 months (same as individuals). The discounted capital gain can be distributed to beneficiaries — potentially to those with lower marginal tax rates.
Key restrictions:
Negative gearing: This is the most significant restriction. If a trust-owned property generates a net rental loss (negative gearing), the loss is trapped in the trust — it cannot be distributed to beneficiaries to offset their personal income. The loss can only be carried forward to offset future trust income. This means trusts do not provide the immediate negative gearing tax benefit that personal ownership does.
By contrast, a unit trust may allow the proportionate share of the loss to flow through to unit holders — depending on the trust deed and how the ATO treats the specific arrangement. However, this is a complex area and requires specialist tax advice.
Land tax surcharge: In some states (notably Victoria and NSW), trusts that hold residential property are subject to land tax surcharges. In Victoria, the 'absentee owner surcharge' (2%) applies to trusts unless the trustee takes specific steps to confirm that all beneficiaries are Australian residents. In NSW, discretionary trusts may face the 'foreign person' surcharge (4%) unless the trust deed includes specific clauses excluding foreign beneficiaries. These surcharges add thousands of dollars per year to the cost of holding property in a trust.
Stamp duty: Some states impose stamp duty surcharges on property transfers involving trusts — or treat trust purchases differently for first home buyer concessions. Trust purchases generally do not qualify for first home buyer stamp duty exemptions or the FHOG.
Trust Losses Cannot Be Distributed to Beneficiaries
If your trust-owned investment property is negatively geared (rental costs exceed rental income), the tax loss is trapped inside the trust. You cannot claim it against your personal income. This is a critical difference from owning property personally — where negative gearing losses directly reduce your taxable income. If your investment strategy relies on negative gearing benefits, personal ownership may be more tax-efficient.
- ✓Income splitting — distribute rental income to lower-tax beneficiaries
- ✓Asset protection — property protected from personal creditors
- ✓50% CGT discount available (held 12+ months)
- ✓Negative gearing losses trapped in trust — cannot offset personal income
- ✓Land tax surcharges apply in VIC and NSW unless deed is compliant
- ✓No FHOG or first home buyer stamp duty concessions for trusts
- ✓Setup costs $1,500–$4,000; ongoing admin $2,000–$5,000/year
How Do Trusts Affect Home Loan Applications?
Lending to trusts is more complex and restrictive than lending to individuals. Key differences:
Fewer lenders: Not all lenders will lend to trusts. Major banks generally do, but some non-bank and smaller lenders do not. Your broker needs to specifically identify lenders that accept trust borrowers.
Personal guarantees required: Because the trust itself is the borrower, the lender requires personal guarantees from the individual trustees (or the directors of the trustee company). This means the individual directors are personally liable for the loan — partially negating the asset protection benefit of the trust structure.
Lower maximum LVR: Some lenders restrict trust lending to 80% LVR (no LMI available for trusts). This means a larger deposit is required.
Trust deed review: The lender will review the trust deed to ensure it permits borrowing and property ownership. Some older trust deeds may need to be updated to satisfy modern lending requirements — an additional legal cost.
Serviceability assessment: The lender assesses the income available to service the loan — typically the rental income from the investment property plus the personal income of the guarantors. The guarantors' other debts and commitments are also factored in.
Documentation: Trust loan applications require additional documents: the trust deed, minutes of trustee resolution to borrow, ABN and TFN of the trust, financial statements for the trust, and personal financial details of all guarantors.
Best practice: Engage a broker experienced in trust lending. They understand which lenders have the most favourable trust policies, can ensure your trust deed meets lending requirements, and can prepare the additional documentation efficiently.
Review Your Trust Deed Before Applying for a Loan
Have your solicitor review the trust deed before approaching lenders. Key requirements include: the power to borrow money and grant security (mortgage), the power to invest in real property, and (for NSW/VIC land tax purposes) specific clauses excluding foreign beneficiaries. Updating a trust deed costs $500–$1,500 — but failing the lender's deed review can delay or prevent the application.
Frequently Asked Questions
About the Author
Sakib Manzoor
Senior Finance Wellness Expert
Sakib Manzoor is the founder of Secure Finance and brings extensive experience in Australian mortgage broking and financial wellness. Specialising in helping clients achieve their property finance goals through personalised strategies and expert guidance, Sakib is FBAA accredited and committed to providing clear, actionable advice. All content is written to meet Australian regulatory standards and is regularly updated to reflect current market conditions.