Discretionary Trusts for Property Developers
Advice on Property Developers Discretionary Trusts by Property Tax Specialists
Discretionary Trusts for Residential Property Development in Australia
For small to medium residential property developers operating as a sole developer or within a family-based development operation, a discretionary trust is often the first structure that comes to mind. It is familiar, widely used, and offers genuine flexibility in how development profits are distributed at project completion. For the right developer in the right circumstances, it can be a well-suited vehicle.
The difficulty is that “discretionary trust” is a broad term that covers a spectrum of arrangements with meaningfully different tax characteristics. A discretionary trust that has made a family trust election operates under a different set of rules to one that has not, and the consequences of that difference are particularly significant in a development context where large profits are typically concentrated in a single year at project completion. Understanding where a discretionary trust sits on that spectrum, and what that means for how development profits can be distributed and how accumulated losses can be applied, is the central question for any developer considering this structure.
At Property Tax Specialists, we help residential developers understand whether a discretionary trust is the right vehicle for their project, how it compares to a family trust and a unit trust for their specific circumstances, and how to establish or review the arrangement so that it operates as intended when it matters most.
Contact Property Tax Specialists for advice specific to your needs.
Discretionary Trust vs Family Trust vs Unit Trust:
Choosing the Right Structure for Your Development
The comparison between these three structures is the starting point for almost every developer structuring conversation we have, and it is worth addressing directly before examining the discretionary trust in detail.
Discretionary Trust
A discretionary trust gives the trustee complete discretion over how income and capital are distributed among beneficiaries each year. No beneficiary has a fixed or guaranteed entitlement. This flexibility is the structure’s primary appeal for developers, as it allows development profits to be directed to beneficiaries with lower marginal tax rates at the point of project completion
Family Trust
A family trust is a discretionary trust that has made a formal family trust election with the ATO. That election unlocks access to the trust loss provisions, making it substantially easier to apply accumulated project costs against development profits at completion. It also restricts distributions to a defined family group, with family trust distribution tax applying at the top marginal rate plus the Medicare levy on any distribution outside that group. The family trust is covered in detail on our family trusts for property developers page, and for most family-based development operations it warrants serious consideration alongside the plain discretionary trust.
Contact Property Tax Specialists for advice specific to your needs.
Unit Trust
A unit trust divides ownership into fixed units, with each unitholder entitled to income and capital in proportion to their unitholding. It does not offer distribution flexibility, but it can accommodate unrelated co-investors without the distribution constraints that apply under a family trust election.
For joint venture projects involving parties outside the family group, a unit trust is typically the more appropriate vehicle. This is covered in detail on our unit trusts for property developers page.
Discretionary Trust without a Family Trust Election
The discretionary trust without a family trust election sits between these positions. It offers distribution flexibility without the restriction to a defined family group, but it also does not benefit from the simplified loss provisions that the family trust election provides.
For some developers that trade-off is the right one. For others it is not, and understanding which category applies to your project requires a careful assessment of your circumstances before acquisition.
Contact Property Tax Specialists for advice specific to your needs.
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How Development Income Is Treated in a Discretionary Trust
Development Profits Are Ordinary Income, Not Capital Gains
Profits generated by residential development activity inside a discretionary trust are generally treated by the ATO as ordinary income rather than capital gains. Where the purpose of acquiring and developing property is to sell it at a profit, the activity is considered to constitute carrying on a business or undertaking a profit-making scheme, rather than the passive realisation of a capital asset.
This means the 50% CGT discount that applies to assets held for more than 12 months is generally not available on development profits. Income flows through to beneficiaries as ordinary income, taxed at their applicable marginal rates in the year of receipt. The distribution flexibility of a discretionary trust remains relevant here, as the trustee can direct that income to the beneficiaries for whom it is most tax-effective in the year of completion. But the CGT discount that is often cited as a key advantage of trust structures for passive investors does not apply to development profits in the same way.
Business Activity vs Passive Investment
Whether a development activity constitutes carrying on a business affects how losses are treated, whether certain concessions apply, and how the trust loss tests operate. The ATO assesses the nature, scale, repetition, and commercial organisation of the activity in making that determination.
For developers using a discretionary trust, this classification has direct implications for the loss provisions discussed below, and it is a factor that should be considered as part of the overall structure assessment.
Contact Property Tax Specialists for advice specific to your needs.
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The Trust Loss Provisions:
The Central Risk for Discretionary Trusts in Development
This is the area where the absence of a family trust election has the most significant practical consequences for residential developers, and it is the most important section of this page to understand before making a structure decision.
How Development Projects Accumulate Losses Before Generating Profits
Residential development projects typically incur substantial costs before any income is received. Acquisition costs, holding costs, council and planning fees, design expenses, and construction finance interest can accumulate over months or years before settlements occur.
During this period, the trust is running at a loss. Those losses cannot be distributed to beneficiaries and offset against their personal income. They are trapped within the trust and can only be applied against future trust income, specifically the development profits generated at project completion.
Applying Accumulated Losses Without a Family Trust Election
Without a family trust election, a discretionary trust that wants to apply prior year losses against current year income must satisfy one of several complex trust loss tests set out in the income tax legislation. For a development trust, the most problematic of these is typically the pattern of distributions test, which requires that the same beneficiaries who received more than 50% of trust income in prior years continue to do so in the year the loss is being applied.
In a development context, the trust may have had little or no distributable income during the development phase, making the pattern of distributions test difficult or impossible to satisfy in any meaningful way. The 50% stake test and the control test can also present difficulties depending on how the beneficiary class is structured and how trustee control is arranged.
If the trust cannot satisfy any of the applicable tests, the accumulated losses cannot be applied against the development profit at completion. The trust pays tax on the full profit, and the losses remain quarantined. For a project with substantial development costs and a significant profit at completion, the tax cost of that outcome can be very large.
Contact Property Tax Specialists for advice specific to your needs.
How This Compares to a Family Trust
A family trust with a correctly made family trust election satisfies the trust loss provisions automatically, provided distributions remain within the defined family group. This means accumulated project losses can be applied against development profits at completion without needing to satisfy the complex tests described above. For a developer whose project involves substantial upfront costs followed by a concentrated profit at settlement, this is a material structural advantage that the plain discretionary trust does not offer.
The question for each developer is whether the benefits of the family trust election, specifically the simplified loss provisions, outweigh the restriction on distributions to the defined family group. In many cases for family-based development operations, the answer is yes. In others, where a broader beneficiary class is needed or where the distribution restrictions create problems, the plain discretionary trust may still be preferable, with the loss issue managed through careful project structuring and timing.
This is precisely the kind of assessment that requires specialist input before the project begins, not after losses have already accumulated.
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GST, the Margin Scheme and Development Trusts
Residential property development carries GST obligations that do not apply to passive investment, and a discretionary trust used for development must address these as part of its structure planning.
Where the development involves the sale of new residential premises or subdivided land, GST will generally apply to the sale proceeds. The margin scheme may be available to reduce the GST liability, allowing GST to be calculated on the margin between the purchase price and the sale price rather than on the full sale price. This can substantially reduce the GST cost of a project and is often a significant factor in project feasibility.
Eligibility for the margin scheme depends on how the property was acquired, by whom, and whether the relevant conditions are met. Where a discretionary trust acquires development land, the trust’s GST registration status, the nature of the supply under which the land was acquired, and the terms of any subsequent sale all affect whether the margin scheme is available.
The trust must also be registered for GST if its development turnover meets the registration threshold, and input tax credits on development costs are available only to a GST-registered trust making taxable supplies. Getting the GST registration and margin scheme election right requires attention at the point of acquisition, not at the point of sale.
The consequences of an incorrect margin scheme election or a failure to register at the appropriate time can be material and in some cases cannot be corrected after the fact.
Contact Property Tax Specialists for advice specific to your needs.
These are areas where specialist advice is essential.
We flag them here because they are consistently underweighted in early-stage development planning, and because a discretionary trust structure that is otherwise well designed can produce poor outcomes if the GST treatment has not been properly considered.
The Benefits of Using a Discretionary Trust for Residential Property Development
Flexible Profit Distribution at Project Completion
The primary advantage of a discretionary trust for a residential developer is the ability to distribute development profits to beneficiaries with lower marginal tax rates at the point of project completion. Where a project generates a substantial profit in a single year, the trustee can direct that income across multiple people, typically family members, reducing the overall tax burden for the group.
This flexibility is not available through personal ownership or a company structure, and it remains one of the most practically significant advantages of the discretionary trust vehicle.
Contact Property Tax Specialists for advice specific to your needs.
Broader Beneficiary Class Than a Family Trust
Unlike a family trust with an FTE, a plain discretionary trust is not restricted to a defined family group for distribution purposes. The beneficiary class can be drawn more broadly, potentially including related entities such as companies or other trusts, providing additional flexibility in how profits are ultimately directed.
For developers whose family circumstances or investment arrangements do not fit neatly within the defined family group of a family trust election, this broader flexibility can be a meaningful advantage.
Asset Protection During the Development Project
Holding the development asset within a properly structured discretionary trust, with a corporate trustee, provides a degree of separation between the development project and the personal assets of the developer.
Development activity carries real commercial risk, and the asset protection characteristics of a well-maintained discretionary trust are a genuine advantage throughout the project lifecycle.
As with all trust structures, this protection must be designed in from the outset and maintained through proper compliance, not added after a problem has arisen.
Contact Property Tax Specialists for advice specific to your needs.
Adaptability Across Multiple Projects
A well-drafted discretionary trust deed can accommodate multiple development projects over time without requiring a new structure for each project.
For developers who intend to undertake a series of projects, this can reduce setup costs and administrative complexity, provided the trust’s activities and distribution practices remain consistent with the deed and the trustee’s obligations.
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The Risks and Limitations of Discretionary Trusts for Property Development
The Trust Loss Provisions Without an FTE Can Produce a Poor Outcome
As detailed above, the inability to satisfy the trust loss tests without a family trust election can result in accumulated project losses being quarantined at the point of profit distribution.
For a project with substantial development costs and a significant profit at completion, this is not a minor technical issue. It is a structural risk with a potentially large dollar cost that should be assessed and addressed before the project begins.
Contact Property Tax Specialists for advice specific to your needs.
Development Losses Cannot Be Distributed to Beneficiaries
Regardless of whether an FTE has been made, losses incurred during the development phase cannot be distributed to beneficiaries and offset against their personal income. They accumulate within the trust.
For developers funding a project over an extended period before reaching settlement, this represents a meaningful opportunity cost compared to personal ownership, where losses from a negatively geared development asset can be applied against personal income in the year they arise.
Not Suitable for Projects Involving Unrelated Co-Investors
A discretionary trust is not an appropriate vehicle for development projects involving unrelated participants. Where co-investment with parties outside the family group is required, a unit trust or a separate joint venture structure is more appropriate.
Attempting to use a discretionary trust for a multi-party development project creates complications around entitlements, distribution obligations, and the legal rights of non-family participants that a properly structured unit trust avoids entirely.
Contact Property Tax Specialists for advice specific to your needs.
Land Tax on Development Land
Development land held within a discretionary trust does not qualify for land tax thresholds in most Australian states. In New South Wales and Victoria in particular, land tax is payable from the first dollar of taxable land value.
For projects involving a lengthy planning or construction phase that spans one or more land tax assessment dates, this is a recurring cost that needs to be factored into project feasibility modelling from the outset.
Trust Deed Quality and Ongoing Compliance
A discretionary trust used for development activity carries the same compliance obligations as any other trust, with the added complexity of development-specific tax issues including GST, the margin scheme, and the treatment of development income as ordinary income rather than capital gains.
A deed drafted for passive investment may not adequately cover development activity, and ongoing compliance throughout the project requires active management rather than a set-and-forget approach.
Contact Property Tax Specialists for advice specific to your needs.
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Take control with expert guidance from Property Tax Specialists.
Book you consultation today to discuss your needs and learn how we can help optimise your tax position.
Structure Planning and Structure Reviews for Development Discretionary Trusts by Property Tax Specialists
Whether you are planning your first residential development project or you have been developing through a discretionary trust for years without an independent review, the structural decisions involved have long-term consequences for how profits are taxed, how losses are managed, and how protected your personal assets are throughout the project.
Trust Structure Planning Service
Our structure planning service works with you before acquisition to assess whether a discretionary trust is the right vehicle for your development project, whether a family trust election should be made and at what point, how the deed should be drafted to accommodate development activity, and how the structure integrates with your GST obligations, financing arrangements, and broader tax position.
Trust Structure Review Service
Our structure review service examines existing arrangements to identify whether the current structure continues to serve your interests, whether the trust deed is adequate for development activity, whether the loss provisions have been properly considered, and what options exist where a restructure, deed update, or change in trustee arrangements is warranted.
Both services reflect the same approach we bring to every engagement: the right structure is determined by the full picture of your circumstances, not by a preference for any particular vehicle.
Contact Property Tax Specialists for advice specific to your needs.
Speak with a Property Tax Specialist About Discretionary Trust Structures for Development
A discretionary trust can be a well-suited vehicle for small to medium residential development projects, particularly for sole developers and family-based operations where profit distribution flexibility is a priority. The comparison with a family trust and a unit trust is central to making the right decision, and the interaction between the trust loss provisions, the family trust election, GST obligations, and profit distribution at project completion requires careful assessment before any commitment is made.
If you are planning a development project and want to ensure your structure is right from the start, or if you want an independent review of an existing discretionary trust arrangement, we are here to help.
Call us on 1800 800 829 or book a structure planning or structure review consultation with the team at Property Tax Specialists.
Contact Property Tax Specialists for advice specific to your needs.
Property Tax Specialists advises Australian residents, Australian expats overseas and overseas nationals investing in Australian property. Our offices are located in Sydney, Melbourne and Brisbane.
