How Are Rental Profits and Capital Gains Taxed Inside a Discretionary Trust?
A discretionary trust isn't taxed on rental profit or gains itself — the presently entitled beneficiary is. How it works, and what changes from July 2027.
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Property investors who use a discretionary (family) trust often assume the trust itself pays the tax bill on a rental property’s profit. It doesn’t. The trust is a structure, not a taxpayer in the usual sense — the actual tax lands on whichever beneficiary the trustee decides should have it.
How are rental profits taxed when a discretionary trust owns the property?
The rental profit isn’t taxed to the trust. It’s taxed to whichever beneficiary the trustee makes “presently entitled” to it for that income year, at that beneficiary’s own personal tax rate — regardless of when the cash is actually paid out. The ATO’s own wording on this is direct: “net income of a trust is taxed in the hands of the beneficiaries (or the trustee on their behalf) based on their share of the trust’s income (that is, the share they are ‘presently entitled’ to) regardless of when or whether the income is actually paid to them.”
So a trust holding one rental property doesn’t file a return and pay tax on the profit itself in the way an individual or a company does. The rental income and deductible expenses are combined into the trust’s “net income” for the year, and it’s the trustee’s distribution decision — not the property title — that decides whose tax return that profit shows up on.
Tax outcomes depend on your circumstances — speak with a registered tax agent before acting.
What is a discretionary trust, and who actually holds the property?
A discretionary trust — often called a family trust — is a structure where a trustee (an individual or a company) holds legal title to an asset, such as a rental property, on behalf of a group of possible beneficiaries named or described in the trust deed. Common beneficiaries are family members and related entities.
What makes it “discretionary” is that no beneficiary has a fixed, guaranteed share. The deed gives the trustee a wide discretion to decide, each year, how much of the trust’s income and capital gains each eligible beneficiary actually receives — that’s the feature that separates it from a fixed (unit) trust, where each unit holder’s percentage is set and doesn’t move.
Can the trustee choose which beneficiaries get the rental profit, and does that choice change every year?
Yes. Because the trustee’s discretion is exercised year by year (usually by a formal distribution resolution), the beneficiary who ends up assessed on a given year’s rental profit can differ from the beneficiary assessed the year before — even though the trustee has held the same property the whole time. Nothing about who is legally on title changes; only who is “presently entitled” to that year’s net income does.
Two situations sit outside this everyday pattern:
- If the trustee doesn’t validly resolve to make anyone presently entitled to the trust’s income by the end of the income year, the ATO’s default rule takes over: the trustee is taxed instead on the corresponding share of the trust’s net income — or on all of it, if no beneficiary is presently entitled to any of it. That trustee assessment is generally at the highest marginal rate that applies to individuals, though some trust types (deceased estates, for example) are taxed at modified rates instead.
- If the trustee resolves to distribute to a beneficiary who is under 18, that distribution is typically not “excepted income” for the minor — a family trust distribution isn’t on the ATO’s list of excepted income (unlike the minor’s own wages, or income from a testamentary trust set up under a will). As at July 2026, the ATO’s current resident minor rates tax that non-excepted income at nil up to $416, then 66% of the amount between $417 and $1,307, then 45% of the amount over $1,307 — well above the ordinary adult tax-free threshold.
Both outcomes turn on your trust’s specific deed and resolutions — a registered tax agent can confirm exactly how they apply to your circumstances.
What happens to a rental loss made by a geared property inside a discretionary trust?
Current law (as at July 2026). Where a rental property’s deductible expenses — including loan interest — exceed the rental income it produces, the result is a net rental loss. Under current law, the ATO describes this plainly: “you may be able to claim a deduction for the full amount of rental expenses against your rental and other income (such as salary, wages or business income)… Where the other income isn’t sufficient to absorb the loss you can carry it forward to the next income year.” There’s no dollar cap and no rental-income-only quarantine on that loss under current law.
For a discretionary trust specifically, a net loss isn’t something the trustee can “distribute” the way a profit is — a trust only has “net income” to allocate to beneficiaries when income exceeds deductions for the year. Exactly how a trust’s own loss then carries forward, and how that interacts with the change below, wasn’t fully confirmed in the sources checked for this article. How a discretionary trust’s own trust-loss rules (under which a net loss stays in the trust and carries forward, subject to the trust loss recoupment tests) interact with the 1 July 2027 negative-gearing quarantine (s26-155) is not addressed in any ATO or Treasury guidance checked as at July 2026 — a discretionary/family trust is not named among the Act’s stated exemptions (widely held unit trusts, complying superannuation entities), but no source confirms how the quarantine applies to a trust-level loss’s own carry-forward and recoupment-test treatment. Speak with a registered tax agent for the position that applies to your trust.
From the 2027-28 income year (enacted, not yet in effect). A separate, already-legislated change will quarantine residential rental deductions that exceed residential rental income: new section 26-155 (inserted by Schedule 2 of the Treasury Laws Amendment (Tax Reform No. 1) Act 2026, which received royal assent on 26 June 2026) means that excess amount will no longer be deductible against other income at all — it can only be used against residential capital gains or carried forward against future residential rental income. Interests acquired before 7:30pm AEST on 12 May 2026 are grandfathered from the change. The Act names two categories that are exempt from the quarantine: widely held unit trusts, and complying superannuation funds. A discretionary (family) trust is not on that exemption list — but exactly how the quarantine’s mechanics apply to a discretionary trust’s own existing loss rules is a genuinely open question in the sources checked here. How the quarantine’s mechanics apply to a discretionary trust’s own existing loss rules is not addressed in any ATO or Treasury guidance checked as at July 2026 — speak with a registered tax agent for the position that applies to your trust.
Tax outcomes depend on your circumstances — speak with a registered tax agent before acting.
How are capital gains taxed when a discretionary trust sells the property? (current law)
The same present-entitlement mechanic that applies to rental income applies, in broad terms, to a capital gain the trust makes on selling the property: it becomes part of the trust’s net income for the year, and is generally included in the assessable income of whichever beneficiary is presently entitled to it. A trust used to hold an eligible asset for at least 12 months (excluding the acquisition and event days) can access the 50% CGT discount before working out that net capital gain — the ATO confirms trusts get the same 50% rate as individuals under current law (companies get none; complying super funds get one-third).
This is the position for CGT events happening before 1 July 2027. Note that the more detailed rules for streaming a capital gain to a specific beneficiary (rather than it simply following the general income entitlement) have their own conditions that sit beyond what’s covered in this article — ask a registered tax agent how they apply to your trust’s resolutions.
What changes for a discretionary trust’s capital gains from 1 July 2027?
A separate reform, enacted with royal assent on 26 June 2026, changes how capital gains are taxed for CGT events happening on or after 1 July 2027. It is law now; it simply hasn’t started applying yet. Three changes matter for a discretionary trust:
- The 50% discount ends for trusts (along with individuals and partnerships) for CGT events from 1 July 2027, except for new residential dwellings and qualifying affordable housing, where it’s retained. Complying super funds keep their one-third discount.
- Cost-base indexation returns — specifically naming trusts. The same Act brings back CPI indexation of the cost base “for individuals and trusts,” excluding costs of ownership (the “third element”), and only for assets held at least 12 months. The exact indexation-factor formula hasn’t been published in a form that can be transcribed here.
- A new 30% minimum tax on capital gains (Division 119). This isn’t a flat 30% rate — it tops up tax on a gain so the pre-offset rate is at least 30% where it would otherwise be lower. The Act’s own wording frames who it applies to around “individuals who are Australian residents.” How that interacts with a capital gain a trust streams to an individual beneficiary hasn’t been confirmed — the Act’s own wording (s119-1/119-10) frames scope around “individual” and “Australian resident” with no trust-flow-through modification found as at July 2026. Speak with a registered tax agent for the position that applies to your trust’s distributions.
For anything the trust still owns on 30 June 2027, the asset is treated as sold and immediately reacquired at its market value just before 1 July 2027 — the Act specifically deals with trust assets under this rule — unless the responsible Minister makes a separate apportionment method available by legislative instrument. As at July 2026, no such instrument has been made, so the market-value approach is the one that currently applies.
| Before 1 July 2027 (current law) | From 1 July 2027 (enacted) | |
|---|---|---|
| CGT discount for an eligible trust | 50% | Ends (new-dwelling and affordable-housing carve-outs aside) |
| Cost base | No indexation | CPI-indexed (named for trusts), excluding ownership costs, 12-month+ holdings only |
| Minimum effective rate on the gain | Ordinary trust/beneficiary rates apply | A 30% floor applies under Division 119 — trust interaction unconfirmed |
Table assumes an Australian resident trust and beneficiaries, an asset held past any relevant minimum period, and ignores state land tax (a separate charge, covered below) — a registered tax agent can model your own numbers. Tax outcomes depend on your circumstances — speak with a registered tax agent before acting.
Does a discretionary trust holding rental property face different land tax rules?
Sometimes, yes — and it’s set state by state, not federally. Victoria is one example: as at July 2026, the general land tax tax-free threshold for Victorian land is $50,000 of taxable value, but a trust’s threshold for the separate trust surcharge sits lower, at $25,000. Land tax thresholds and surcharges move with state and territory budgets, so treat any figure here as time-stamped to July 2026, not permanent — and check the relevant state or territory revenue office directly, since the settings differ by jurisdiction and this article doesn’t attempt a full state-by-state comparison for trust-held property.
Tax outcomes depend on your circumstances — speak with a registered tax agent before acting.
Can a Brix (a fractional interest in a property) be held inside a discretionary trust?
MyBrix’s own product disclosure statement names trusts as one of the investor structures it’s built for, alongside individuals, companies and self-managed super funds — and it’s explicit that tax outcomes aren’t uniform across them: “Tax outcomes may differ depending on the investor’s profile and structure, including whether the investor is an individual, company, trust or self-managed superannuation fund (SMSF).”
That’s consistent with how any fractional property distribution is taxed more broadly: the ATO doesn’t publish a single blanket answer for “fractional property” as a category — the correct treatment follows the legal structure behind the specific product and the investor’s own statement from it. MyBrix’s PDS puts the same point directly to Brix holders: distributions “may be assessable income in the year you receive them,” and “the timing and character of such amounts (income vs capital) may vary depending on the structure of the relevant listing and your circumstances” — which is why the PDS itself calls for “independent tax advice from a registered tax agent or suitably qualified adviser” before relying on any particular treatment. Our guide to how fractional property investment is taxed in Australia goes through the general mechanics in more depth.
Tax outcomes depend on your circumstances — speak with a registered tax agent before acting.
What should you check before using a trust to hold an investment property?
A trust isn’t the only way to hold a rental property, and no government page ranks it against individual ownership, a company, or an SMSF as the “best” structure — each carries different tax and asset-protection consequences that depend on your own circumstances. Points worth raising with a registered tax agent or licensed financial adviser before deciding:
- What your specific trust deed says about eligible beneficiaries, streaming powers, and the trust’s vesting date.
- Whether a corporate trustee or an individual trustee suits your situation.
- How your state or territory’s land tax rules — including any trust surcharge — apply to the specific property.
- How the 1 July 2027 CGT and negative-gearing changes will affect a trust you already hold, or one you’re setting up now.
- Whether direct property ownership, a Brix held via the trust, or another structure fits how you want to invest.
None of this is a recommendation of one path over another — the right structure depends on the trust deed, the people involved, and goals a professional needs to see in full before advising on them.
For the broader picture of how property investment works before you get into structuring decisions, see our guide to property investment in Australia. And if negative gearing itself is the part you want to understand first, our guide to cash flow positive versus negatively geared property covers that ground.
