Discretionary Trusts Explained for Property Investors, The 47 Percent Trap, Lending Changes, and Land Tax

A trust can be a powerful property investing tool. It can also create expensive surprises.

Two big ones came up in this conversation:

• You cannot distribute trust income to just anyone.
• In NSW, the wrong trust setup can mean land tax from the first dollar.

If you are building a portfolio, structure matters. But structure comes after borrowing capacity and strategy.

What Happened

In this episode, Jack and the team spoke with Resh from Incentum Group about trusts for property investors. The discussion was sparked by headlines about lenders pulling back from trust lending.

They broke it down into practical investor language:

• What a trust is, legally and operationally
• When a discretionary trust makes sense
• When a unit trust fits better
• The most common tax myths
• Why land tax becomes state-by-state complexity, especially in NSW
• Why finance needs to come first, then accounting structure, then costs

Key Findings

1. A discretionary trust is a flexible income bucket, not a free-for-all

A discretionary trust can give the trustee flexibility to decide who receives distributions each year and in what proportions. But the flexibility is still bounded by rules.

The big investor misconception is thinking distributions can go to anyone. They cannot. If a family trust election is in place, distributing outside the defined family group can trigger family trust distribution tax at 47 percent.

Investor takeaway: the deed, elections, and beneficiary group definitions matter as much as the property.

2. Trusts do not automatically save tax

One of the most common myths is that a trust equals tax savings.

Resh explained the early years problem. If the property is heavily negatively geared, there may be little or no distributable income. Trust losses can be trapped in the trust, meaning you may not get the personal negative gearing benefit you would have received owning the property in your own name.

Investor takeaway: a trust can be a longer-term play that becomes more useful as yields rise and the portfolio matures.

3. Unit trusts are about fixed entitlements and clarity

A unit trust was described as the trust version of a company.

• A company issues shares
• A unit trust issues units

Unit holders have fixed entitlements to income and capital, such as 40 percent and 60 percent. There is no annual discretion like a family trust.

This structure can be a better fit when:

• Buyers are unrelated parties, business partners, or friends
• Contributions are unequal and need clean alignment with ownership
• Investors want clear exit options via transfer of units rather than selling the property itself

Investor takeaway: a unit trust can reduce relationship and governance friction, but it needs solid documentation, including a unit holders agreement.

4. Land tax is where trust strategy gets messy fast

Land tax was framed as a state-based tax with different thresholds, rates, and trust rules in every state. There is no single national rule.

The NSW example stood out.

• Some fixed trusts can qualify for the NSW land tax threshold, but only if the deed meets specific NSW requirements
• Discretionary trusts in NSW can be land taxed from the first dollar, meaning no threshold applies in practice in the way investors often assume

They also discussed aggregation risk. If unit holders must be disclosed and holdings are aggregated, the threshold benefit can be reduced or eliminated depending on how the trust is registered and how the investor already holds property.

Investor takeaway: trust type alone is not enough. The deed detail and registration approach can change the outcome.

5. The hierarchy that stops investors from making costly mistakes

The episode landed on a simple hierarchy:

1. Finance comes first, because you cannot buy without borrowing capacity
2. Accounting structure comes next, because it needs to fit lending rules plus tax, estate planning, and risk
3. Property strategy and market selection stay central
4. Costs of doing business come last, not first

If investors start with cost and tax fear, they can unintentionally block their own portfolio growth by excluding markets, delaying action, and shrinking options.

Action Steps

1. Start with lending rules
   Ask your broker how trust lending is assessed right now, including servicing, guarantees, documentation, and lender policy shifts.
2. Have a property-focused accountant review structure options
   Cover discretionary trust, unit trust, and personal ownership in one meeting. Tie the decision to your portfolio plan, not just the next purchase.
3. Map distributions, beneficiary rules, and elections early
   Make sure the trust deed matches your family and future plans. Confirm how family trust elections affect distribution flexibility.
4. Model negative gearing in year 1 to year 5
   If early losses are likely, understand whether those losses will be trapped and how that changes your after-tax cash flow.
5. Do a land tax check by state before you choose locations
   Run scenarios for NSW, VIC, and QLD using your planned purchase price, current holdings, and likely structure. Confirm aggregation rules and registration details.
6. Treat costs as the final filter, not the first
   Trust setup, annual accounting, and land tax are real costs. But they should be weighed after you confirm strategy, borrowing, and market fit.

Final CTA

Want clarity on whether a trust helps your portfolio, or slows it down? Book a free discovery call and we will map your borrowing capacity, structure options, and market strategy into one plan. Visit investorkit.com.au to book your discovery call.