Trusts vs Companies for Property Investment in Australia
The choice between holding property in a discretionary trust, a unit trust, or a company is one of the most consequential decisions in commercial property investment. It affects CGT outcomes at sale, income tax during the holding period, land tax aggregation in some states, asset protection from creditors, lending appetite, and the practical mechanics of passing the asset to the next generation.
None of the three is best in the abstract. Each wins on a different axis, and the buyer-side calls that matter get made before contract, not after settlement.
Companies are simple but tax-disadvantaged for property. Trusts are flexible, but land tax turns on the state. Get the structure wrong and the cost compounds across the whole hold; get it right once and forget it.
The Three Structures at a Glance
Discretionary trust (family trust)
A trustee holds property for a class of potential beneficiaries, and can distribute income and capital gains among them at its discretion each year. Asset protection is strong, income flexibility is high, and land tax treatment varies by state.
Unit trust
A trustee holds property for unit holders, each with a defined beneficial interest. Income flows to unit holders in proportion to units held. Some states allow a land tax pass-through. Common in property syndicates.
Company
A legal entity that holds property in its own name. Income is retained or distributed as dividends to shareholders, and the corporate tax rate of 25% or 30% applies. There is no CGT discount. Simple, but tax-disadvantaged for property held directly.
1 CGT Treatment
Discretionary trust
Capital gains are taxed in the trust but distributed to beneficiaries, and the 50% CGT discount flows through to individual beneficiaries where the asset has been held 12+ months and the beneficiary is an individual or fixed unit trust. For property held by Australian resident individuals, this is the most tax-efficient structure.
Unit trust
Capital gains flow through to unit holders. The 50% discount applies where the unit holder is an individual or eligible trust. A company unit holder gets no discount.
Company
No 50% CGT discount. Gains are taxed at the corporate rate, 25% for small business companies and 30% for standard. Distributing to shareholders as franked dividends adds another layer of tax.
2 Income Tax During the Holding Period
Discretionary trust
Net income is distributed to beneficiaries each year, and the trustee chooses who receives what, within the limits of the trust deed. That lets income go to lower-marginal-rate family members, or to a corporate beneficiary for retention.
Unit trust
Income flows in proportion to units. Less flexible than a discretionary trust, but the defined economic interest suits commercial property syndicates.
Company
Income is taxed at the corporate rate, then retained for reinvestment or paid out as dividends. Franking credits attach to those dividends and reduce the shareholder's tax on the distribution.
3 Land Tax
Discretionary trust
Treated differently in each state. In NSW and Victoria, discretionary trusts face higher land tax rates and lower thresholds unless the trust deed specifically excludes foreign beneficiaries. The trust surcharge can move the holding-cost picture materially.
Unit trust
In some states a fixed unit trust passes the tax-free threshold through to unit holders, a more favourable land tax outcome than a discretionary trust holding the same land. The deed has to satisfy the state revenue office's fixed-trust criteria.
Company
Assessed much like individual ownership in most states, and generally without the trust surcharge. Land tax aggregation across multiple properties still applies.
4 Asset Protection
Discretionary trust
Strong. Beneficiaries have no defined entitlement to trust assets, so a beneficiary's creditors generally cannot reach them. This depends on the specific structure, and bankruptcy or family law can override it in some cases.
Unit trust
Moderate. Unit holders hold a defined economic interest, so their creditors can attach the units. Trust assets are protected from the trustee's creditors, but not from the unit holders' creditors.
Company
Moderate. Shares can be attached by a shareholder's creditors. Company assets are protected from those creditors, but the shares themselves are exposed.
5 Lending Appetite
Discretionary trust
Most commercial lenders accept discretionary trust borrowers, usually with personal guarantees from the individual trustees or controlling individuals. A few niche lenders baulk at the income-distribution flexibility.
Unit trust
Widely accepted by commercial lenders, again with personal guarantees. Documentation runs more complex than individual ownership, but it is well-precedented.
Company
A standard corporate borrower, with personal guarantees from directors. This is the cleanest lending structure for a single-owner-controlled entity.
6 Succession and Generational Transfer
Discretionary trust
Strong. The trust carries on across generations, with control passing through the appointor, the person with power to remove and appoint trustees. Beneficiaries can be added or removed within the deed. This is the principal vehicle for multi-generational property wealth.
Unit trust
Moderate. Units can move to family members, but the transfer usually triggers CGT for the unit holder. Estate planning needs unit-transfer mechanisms.
Company
Moderate. Shares can move to family members, but again this usually triggers CGT, and stamp duty under landholder duty where the company holds property above the thresholds. Estate planning needs share-transfer mechanisms and careful structuring.
7 Stamp Duty on Acquisition
Stamp duty on the acquisition itself is generally the same across structures, since the buying entity pays the same dutiable amount. The differences show up in two places:
- Foreign purchaser surcharge. Applies to trusts and companies with foreign-linked beneficial ownership, at the same rates as individuals.
- Landholder duty. Acquire a land-holding company or trust at the equity level (for example, shares in a property-holding company) and landholder duty can apply as if the property had been acquired directly.
8 Practical Decision Framework
Use a discretionary trust when
- The investor has family members at varying marginal tax rates.
- Asset protection from personal creditors is a priority.
- Multi-generational succession is a planning consideration.
- The state's land tax trust surcharge is manageable in the specific scenario.
Use a unit trust when
The investment involves multiple investors with defined economic interests (a property syndicate), and the fixed-trust land tax pass-through is available in the relevant state.
Use a company when
Property is held in the course of a business (for example, a property development business), or as a beneficiary of a discretionary trust to receive trust distributions for retention at corporate rates. Direct property holding in a company is rarely optimal for long-term passive investment.
Frequently Asked Questions
Can I change the structure after purchase?
Generally yes, but the change typically triggers CGT and stamp duty in most states. Restructuring is expensive, which is why the structure decision at purchase is the one to get right.
Are there hybrid structures?
Yes. Common variants include unit trusts with a corporate trustee, discretionary trusts with corporate beneficiaries, and structures combining a discretionary trust for property holding with a company for active business income.
What about SMSF ownership?
SMSF ownership is a separate analysis with specific advantages (15% accumulation rate, 0% pension rate) and constraints (LRBA single-acquirable-asset rule, in-house asset rule). Covered in the SMSF Commercial Property & LRBA article.
Does the structure decision change for SMSF members buying business real property?
Often yes. An SMSF can hold business real property and lease it back to the member's business at arm's length, giving access to the 15% accumulation rate and 0% pension rate on the rental income.
