Trust Structures for Residential Builders (Discretionary vs Unit)

What it is

A trust is a relationship where a trustee holds property or runs a business for the benefit of beneficiaries. In Australian residential construction, two trust types dominate: the discretionary trust (often called a family trust) and the unit trust.

Trusts are not separate taxpayers in the same way as companies. A trust does not generally pay tax on income that is distributed to beneficiaries who are presently entitled at year end. The beneficiary includes their share in their own assessable income and pays tax at their marginal rate.

Discretionary trust

A discretionary trust gives the trustee complete discretion to decide which beneficiaries receive distributions of income and capital, and in what proportions, each year. Beneficiaries have no fixed entitlement until the trustee resolves to make a distribution.

How builders use them

Discretionary trusts are common for builders because they offer:

• Income splitting between adult family members on lower marginal rates
• Streaming of capital gains and franked dividends to the beneficiary best suited to receive them
• Asset protection from individual creditor claims (the assets are owned by the trustee, not the beneficiaries)
• Flexibility year to year as family circumstances change

A builder running their trade through a discretionary trust with their spouse and adult children as beneficiaries can distribute trading profits to whoever has the lowest marginal tax rate that year.

Trust resolutions

The trustee must make a written resolution about distributions for each income year by 30 June (or earlier if the trust deed requires). Without a valid resolution, the trustee is taxed on the trust income at the top marginal rate plus Medicare. Trustees streaming capital gains or franked distributions must specifically identify those amounts in the resolution.

Section 100A and reimbursement agreements

The ATO actively reviews discretionary trust distributions under section 100A of the Income Tax Assessment Act 1936. If a distribution is part of a "reimbursement agreement" (broadly, where the beneficiary's entitlement is not actually paid to them but is paid to or applied for another person's benefit), the trustee is taxed at top marginal rates. Family arrangements taken in the ordinary course of family dealing are excluded, but the line is narrow. PCG 2022/2 and TR 2022/4 set out the ATO compliance approach.

Unit trust

A unit trust is closer to a company in structure. Beneficiaries (called unitholders) hold a fixed number of units that entitle them to a proportionate share of income and capital. There is no discretion in distributions.

How builders use them

Unit trusts are common where unrelated parties are pooling capital, for example two builders forming a joint venture for a multi unit development, or a builder partnering with a passive investor. Each party holds units in proportion to their investment.

Unit trusts also work for property holding entities (a separate unit trust holding a yard or office leased back to the trading entity), giving cleaner separation of trading risk from property.

Tax treatment

Income flows to unitholders in proportion to their units. There is no income splitting flexibility. Capital gains and franked distributions flow through with their character intact. Unit trusts can be land tax efficient in some states because each unitholder is assessed on their proportionate land holding rather than the trust being assessed as a single owner (state rules vary).

Hybrid trusts

A hybrid trust mixes discretionary and unit trust features. The ATO has historically targeted aggressive hybrid trust structures (TR 2002/4 and Taxpayer Alert 2008/3 area). Hybrid trusts are no longer recommended without specific advice.

The 2028 minimum trust tax

On 12 May 2026, the Federal Budget announced a 30% minimum tax on discretionary trusts from 1 July 2028. The minimum tax will apply at the trustee level. Non corporate beneficiaries who are presently entitled to a share of net income will be able to claim a non refundable income tax credit for the tax paid by the trustee.

The Government will also introduce a time limited three year restructure rollover to allow assets to be moved out of discretionary trusts to other entities. Builders running through discretionary trusts should plan now. The legislation is not yet drafted (as of May 2026) but the policy direction is clear.

Comparing the two

A discretionary trust suits a family builder business with profits to allocate flexibly across family members. A unit trust suits unrelated parties pooling capital for a defined project. Neither suits a builder who wants to retain profits in the entity at company rates - that calls for a company structure, often with a bucket company as a corporate beneficiary of a trust.

Common builder issues

Trustees need to make valid 30 June resolutions every year. Many DIY trust structures fail this test, exposing the trust to top marginal rate taxation.

Trust losses are trapped in the trust and only released against future trust income if the trust satisfies the trust loss rules (the family trust election test, the 50% stake test or the pattern of distributions test).

A family trust election (FTE) made by a discretionary trust restricts distributions to the test individual and their family group but improves loss utilisation and franking credit access. The FTE is hard to revoke once made.

When to get advice

Setting up a trust costs more than a sole trader registration and ongoing accountant fees are higher. A trust structure that suits a $300k profit builder may be wrong at $80k. Get advice before deciding the entity type, and review every few years.