Labor Budget Shakes Testamentary Discretionary Trust Budget Changes

Federal budget proposals have accelerated testamentary discretionary trust budget changes as investors revisit how they hold property. The pressure comes from proposed shifts around negative gearing, capital gains tax and trusts.

Discretionary trusts became popular because they offered flexibility, access to the 50 per cent capital gains tax discount and the ability to distribute income strategically among family members. That mix has helped them play a central role in property investment structures.

Capital gains tax and trusts

If the system moves toward CPI indexation rather than the existing 50 per cent discount model, many trust structures holding growth assets may become less tax-efficient. Proposed CGT changes may reduce one of the biggest reasons investors used trusts in the first place.

Companies still have a place in property investment, but they trap losses when a property is negatively geared. Those losses in a company cannot reduce salary or other personal income, and companies generally do not receive the same long-term capital gains treatment available elsewhere in the system.

Property investors revisit structures

After the recent federal budget proposals, investors have started revisiting trust and company structures. The tax changes may materially alter where, when and why trusts and companies make sense for holding long-term residential property.

25 per cent and 50 per cent are now the figures framing the decision. If the proposed changes move forward, the appeal of discretionary trusts for growth assets could narrow, even though trusts and companies still remain part of the property toolkit.

Family trusts under pressure

The sharper question is whether the tax advantage that made discretionary trusts attractive survives the budget debate. Property investors who used trusts for flexibility and CGT discount access now face a structure that may need rethinking before the rules move further.