When it comes to property investment, selecting the right trust structure can have significant financial and tax implications. The two most common trust structures in Australia are discretionary trusts and unit trusts, each offering unique benefits depending on your investment strategy.

Key Benefits of a Discretionary Trust

A discretionary trust (also known as a family trust) gives the trustee full control over distributing income and capital to beneficiaries. Some of the main advantages include:

• Flexible Income Distribution – Trustees can allocate income in a tax-effective manner to beneficiaries, helping to minimise overall tax liability.
• Asset Protection – Assets held in the trust are generally safeguarded from creditors and legal claims against individual beneficiaries.
• Estate Planning Benefits – A discretionary trust allows wealth to be managed across generations without triggering capital gains tax upon inheritance.
• Potential Tax Benefits – While losses are quarantined within the trust, they can be offset against future income within the trust, making it suitable for long-term investment planning.

Consideration: Loss Quarantining & Income Distribution Strategy

One key downside for property investors is that any losses incurred within the trust cannot be distributed to beneficiaries. Instead, these losses are quarantined within the trust and can only be offset against future income earned by the trust. A common strategy is to use a second discretionary trust generating positive income to distribute earnings to the property-holding trust, allowing it to utilise the quarantined losses and reduce taxable income.

Key Benefits of a Unit Trust

A unit trust operates more like a partnership, where unit holders own fixed portions of the trust’s assets and income. Key benefits include:

• Pass-Through of Tax Benefits – Unlike discretionary trusts, unit trusts allow losses to flow through to unit holders, enabling them to offset the losses against personal income.
• Clear Ownership Structure – Each unit holder has a defined stake in the trust, making it easier to allocate income and capital gains.
• Investment-Friendly Structure – Commonly used for joint property investments or syndicates where multiple parties hold fixed entitlements.

Interest Deduction and Loan Structuring

If a loan is taken out by the unit trust to purchase an investment property, the interest expense belongs to the trust, not the individual unit holders. Unlike a discretionary trust, where income distribution can be adjusted, a unit trust must issue additional legal documents (such as a loan agreement) to properly shift the interest deduction to the individual unit holders. Without this documentation, the ATO may not allow individual unitholders to claim the interest deduction on their personal tax returns.

Self-Sustaining Trusts and Lender Considerations

A self-sustaining trust is a trust that generates enough income to cover its own expenses, including loan repayments, without relying on external income distributions. Some lenders may ignore the loan of a self-sustaining trust when assessing an individual borrower’s serviceability, as the trust is not dependent on external income sources. This can be particularly beneficial for investors who want to keep their personal borrowing capacity intact while holding investment properties under a trust structure.

However, lenders have different policies regarding self-sustaining trusts, so it’s important to seek professional advice and confirm lender requirements before structuring a loan within a trust.

Choosing the Right Trust Structure for Your Investment Property

Both discretionary and unit trusts have their pros and cons. Here’s a quick comparison:

Feature	Discretionary Trust	Unit Trust
Control over income distribution	High	Fixed (based on unit holdings)
Loss quarantining	Yes (cannot distribute losses)	No (losses flow to unit holders)
Asset protection	High	Moderate
Interest deduction on loans	Stays within trust	Requires legal documents to shift to unit holders
Suitable for	Long-term wealth building with flexible income distribution	Investors wanting direct tax benefits from losses
Loan treatment by lenders	May be excluded if self-sustaining	Typically included in serviceability assessment