Family Trusts for Property Developers
Advice on for Property Developers on Family Trusts by Property Tax Specialists
Family Trusts for Residential Property Development in Australia
For small to medium residential property developers in Australia, choosing the right ownership structure before a project begins is one of the most consequential decisions you will make. It affects how development profits are taxed, how income is distributed at project completion, what happens if the project generates a loss, and how exposed your personal assets are if something goes wrong.
Contact Property Tax Specialists for advice specific to your needs.
A family trust is one of the structures most commonly considered by residential developers, and one of the most frequently established without adequate specialist input. The flexibility it offers is real, but so are the constraints.
In a development context specifically, those constraints interact with the tax rules in ways that differ meaningfully from how a family trust operates for a passive property investor, and understanding those differences is essential before committing to the structure.
At Property Tax Specialists we:
Family Trust vs Discretionary Trust:
Why the Distinction Matters for Developers
With property investors, the terms “family trust” and “discretionary trust” are often used interchangeably in everyday conversation.
For developers, the distinction between a discretionary trust that has made a family trust election and one that has not is particularly important, because development projects generate concentrated profits at completion rather than steady income over time – and how those profits can be distributed depends in part on whether the trust has made that election and whether accumulated losses from the project can be applied against them.
Discretionary Trust
A discretionary trust is a trust in which the trustee holds complete discretion over how income and capital are distributed among beneficiaries each year.
Family Trust
A family trust is a discretionary trust that has lodged a formal family trust election (FTE) with the ATO, nominating a specific individual as the test individual. That election changes how the trust is treated under the trust loss provisions and restricts distributions to a defined family group.
For developers running projects through a trust, the presence or absence of an FTE is not a minor administrative detail. It is a structural factor with direct implications for how development profits can be distributed and whether project-related losses can be applied against those profits when they arise.
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How Development Income Is Treated Inside a Family Trust
Before addressing the FTE and losses, it is important to understand how the ATO treats income generated by development activity inside a trust – because it is not treated the same way as passive rental income.
Development Profits Are Ordinary Income, Not Capital Gains
For a passive property investor who holds a property for the long term and sells it, the profit is generally treated as a capital gain, potentially eligible for the 50% CGT discount if the asset has been held for more than 12 months. For a property developer (including a small residential developer undertaking subdivisions, knockdown rebuilds, or multi-unit projects) the ATO will generally treat the profit from sale as ordinary income rather than a capital gain.
This is because the activity of developing and selling property for profit is considered to be carrying on a business or undertaking a profit-making scheme, rather than passively realising a capital asset. The consequence is that development profits are assessed as ordinary income in the year of receipt, taxed at the applicable marginal rates, and the 50% CGT discount is not available.
This distinction is critical for how a family trust is used in a development context. The income flexibility that makes discretionary trusts attractive (the ability to distribute income to beneficiaries on lower marginal rates) remains available for development profits. But the CGT discount streaming benefit that is often cited as a key advantage of trusts for investors does not apply in the same way to development income.
Business Activity vs Passive Investment:
Why the Line Matters
Whether a particular development activity constitutes carrying on a business or a one-off profit-making undertaking affects a range of tax outcomes, including the application of the small business concessions, the treatment of pre-CGT assets, and certain GST obligations.
The line between a passive investor who occasionally develops property and an active developer carrying on a business is not always clear, and the ATO examines the nature, scale, repetition, and commercial organisation of the activity in making that assessment.
For developers using a family trust, understanding where their activity sits on that spectrum (and structuring accordingly) is an important part of getting the arrangement right from the start.
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The Family Trust Election in a Development Context
How Development Projects Generate Losses Before They Generate Profits
Residential development projects frequently incur significant costs before any income is received. Acquisition costs, holding costs, council fees, design and planning expenses, and construction finance interest can accumulate over months or years before a single settlement occurs. During this period, the trust may be running at a loss.
As noted on our family trust page for property investors, losses inside a discretionary trust 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. For a development project, this means that costs incurred during the development phase accumulate as trust losses that sit on the trust’s books until project income arrives at settlement.
When settlements do occur and the trust generates development profits, the question becomes whether those accumulated losses can be applied against the profit, and this is precisely where the presence or absence of an FTE becomes decisive.
Applying Accumulated Losses Against Development Profits – The FTE Advantage
Without an FTE, a discretionary trust that wants to apply prior year losses against current year income must satisfy one of several complex trust loss tests. 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 current year. 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 be difficult to satisfy depending on how the trust’s beneficiary class is structured and how trustee control is arranged.
With an FTE in place, the trust loss provisions are satisfied automatically, provided distributions remain within the defined family group. This means accumulated project losses — costs incurred during the development phase that have built up over months or years — can be applied against development profits at settlement without needing to satisfy those complex tests.
In practical terms, for a developer who has incurred substantial costs during a project and is now approaching settlement and profit distribution, the FTE can make the difference between being able to apply those accumulated losses against the project profit and being denied that benefit entirely. The tax cost of that denial, particularly on a substantial development profit, can be very significant.
Contact Property Tax Specialists for advice specific to your needs.
The Trade-Off:
Distribution Restrictions Under the FTE
The benefit of the FTE in a development context comes with the same trade-off that applies to all family trusts: distributions are restricted to the test individual and their defined family group under the tax legislation. Any distribution outside that group attracts family trust distribution tax at the top marginal rate plus the Medicare levy.
For a developer who is working with business partners, investors, or joint venture participants outside the family group, this is a hard constraint. A family trust with an FTE is not an appropriate vehicle for a development project involving unrelated co-investors. Where that is the arrangement, a unit trust, a corporate structure, or a separate joint venture vehicle is likely to be more appropriate, and the structure needs to be assessed before acquisition.
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GST, the Margin Scheme and Development Trusts
Residential property development in Australia carries GST obligations that do not apply to passive investment, and the interaction between those obligations and the trust structure requires careful attention.
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 in certain circumstances, but eligibility depends on how the property was acquired, by whom, and whether the vendor and the purchaser meet specific conditions.
Getting the GST treatment wrong (or failing to plan for it) can have a material impact on project profitability. The trust structure itself can affect GST registration obligations, the availability of input tax credits, and the application of the margin scheme, and these issues should be addressed as part of the structure planning process before acquisition rather than at the point of sale.
These are areas where specialist advice is essential. We flag them here because they are frequently overlooked in early-stage development planning and because the consequences of getting them wrong are significant.
Contact Property Tax Specialists for advice specific to your needs.
The Benefits of Using a Family Trust for Residential Property Development
Flexible Profit Distribution at Project Completion
The primary advantage of a family 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, distributing that income across multiple family members (rather than concentrating it in the hands of a single high-income individual) can meaningfully reduce the overall tax outcome for the family group.
This flexibility is not available through personal ownership or a company structure, where profits are either taxed in the hands of the individual owner or retained at the company tax rate. For family developers, it remains one of the most practically significant advantages of the trust vehicle.
Contact Property Tax Specialists for advice specific to your needs.
Asset Protection During the Development Project
Development activity carries commercial risk – contractor disputes, cost overruns, financing complications, and potential liability claims are all real possibilities.
Holding the development asset within a properly structured family trust, with a corporate trustee, provides a degree of separation between the development project and the personal assets of the developer.
This separation is not absolute, and it depends heavily on how the structure is established and maintained, but it is a meaningful protective layer when designed correctly from the outset.
Adaptability Across Multiple Projects
A well-drafted family trust deed can accommodate multiple development projects over time without requiring the establishment of a new structure for each project.
This can reduce setup costs and administrative complexity for developers who intend to undertake more than one project, provided the trust’s activities and distribution practices remain consistent with the deed and any elections in place.
Contact Property Tax Specialists for advice specific to your needs.
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The Risks and Limitations of Family Trusts for Property Development
Development Losses Cannot Be Distributed to Beneficiaries
As with passive investment, losses incurred during the development phase of a project cannot be distributed to beneficiaries and offset against their personal income. They accumulate within the trust.
For developers who are funding a project over an extended period before reaching settlement, this can represent a meaningful opportunity cost compared to holding the project in a structure where losses can be more immediately utilised.
Contact Property Tax Specialists for advice specific to your needs.
The FTE Must Be in Place Before It Is Needed
The family trust election cannot be made retrospectively to capture the benefit of losses that have already accumulated. If the trust does not have an FTE in place by the time it needs to apply accumulated losses against development profits, it may find itself unable to do so without satisfying the complex trust loss tests – which, as noted above, can be very difficult in a development context.
Establishing whether an FTE should be made, and making it at the right time, is part of the structure planning process and should not be left until the project is already underway.
Not Suitable for Projects Involving Unrelated Co-Investors
Where a development project involves parties outside the defined family group, a family trust with an FTE is not the appropriate vehicle. Distributing profits to unrelated co-investors would trigger family trust distribution tax.
For joint venture projects or developments involving external investors, the structure needs to be designed differently from the start.
Contact Property Tax Specialists for advice specific to your needs.
Land Tax on Development Land
Development land held within a family trust does not qualify for land tax thresholds in most Australian states. In New South Wales and Victoria in particular, land tax becomes payable from the first dollar of taxable land value.
For projects that involve holding land through a planning or construction phase over one or more land tax assessment dates, this is an ongoing cost that needs to be factored into project feasibility modelling.
Compliance and Deed Quality
A family trust used for development activity carries the same compliance obligations as any other trust (annual distribution resolutions, tax returns, trustee documentation, and management of any corporate trustee obligations) with the added complexity of development-specific tax issues including GST, the margin scheme and the treatment of development income.
A deed that was drafted for passive investment may not adequately cover development activity and a review of the deed before commencing a project is advisable.
Contact Property Tax Specialists for advice specific to your needs.
Get Advice on Your Property Tax
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 Family Trusts by Property Tax Specialists
Whether you are planning your first residential development project or you have been developing through a 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 during the project.
Trust Structure Planning Service
Our structure planning service works with you before acquisition to assess whether a family 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 an FTE is in place and correctly configured and what options exist where a restructure or update 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 family trust can be an effective vehicle for residential property development, but the details matter considerably more than they do for passive investment. The interaction between the family trust election, the trust loss provisions, development income treatment, GST obligations, and profit distribution at project completion is a complex set of moving parts. And getting any one of them wrong can have a material impact on the financial outcome of a project.
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 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.
