Discretionary Trust Tax Reforms Could Threaten One in Four Australian Property Projects — What Developers Need to Know

Key takeaway: New industry polling shows that proposed federal government changes to discretionary trust taxation could threaten one in four property development projects currently in Australia's pipeline. Developers and investors using trust structures should review finance arrangements now — non-bank commercial lenders and bridging finance providers offer greater flexibility when project economics shift.

What Are the Proposed Discretionary Trust Tax Reforms?

Federal government proposals to reform the taxation of discretionary trusts have emerged as a flashpoint for Australia's property development sector. Industry polling published this week by Australian Broker links the proposed changes to potential project cancellations, with roughly one in four development projects currently in the pipeline identified as being at risk.

The Adviser also reports that industry groups have warned the reforms could "shrink the housing pipeline" — a serious concern at a time when Australia is already facing a structural shortfall in new housing supply.

Discretionary trusts are a cornerstone of Australian property development finance. They allow trustees to distribute income to beneficiaries flexibly, which has historically supported the economics of small-to-medium development projects by optimising tax outcomes across family or business structures. The proposed reforms reportedly aim to restrict this income distribution flexibility — and if implemented, would significantly alter the financial modelling underpinning many planned projects.

"The federal government's proposed changes to discretionary trusts could unsettle the housing pipeline at a time when supply is already under severe pressure." — Industry commentary, The Adviser, September 2026

How Trust Tax Changes Flow Through to Property Finance

The financial impact on development projects operates through two main channels:

Return modelling and project viability: Discretionary trusts have historically allowed developers to distribute profits to family members or associated entities in lower tax brackets, improving overall project returns. If this flexibility is curtailed, projects that were marginal under previous assumptions may no longer be viable — potentially triggering cancellations before construction begins.

Lender appetite and risk assessment: Non-bank commercial and bridging lenders assess each development project's financial feasibility on its specific merits. If proposed trust reforms reduce the projected internal rate of return (IRR) for a project, developers may need to renegotiate their finance structures — increasing equity contributions, shortening loan terms, or working with a flexible lender who can accommodate revised project economics.

For projects already under construction, the changes could affect exit strategy timing. Bridging finance and development loans are typically structured around a defined sales or refinance exit — any shift in project viability could extend that timeline.

Which Property Structures Are Most Affected?

The reforms are most relevant to property developers, investors, and builders who:

• Hold development projects through a family discretionary trust
• Distribute development profits across multiple beneficiaries
• Rely on trust income splitting as part of project return modelling
• Are mid-way through a project with a trust-based ownership structure

Residential developers working on sub-divided lots, boutique apartment projects, or multi-unit townhouse developments are among those most commonly using discretionary trust structures in Australia.

What Developers Should Do Before Reforms Are Finalised

Given the proposed reforms have not yet been legislated, there is still time to assess their impact and adjust finance structures accordingly:

1. Engage your accountant to model how the changes would affect your trust's income distribution and overall project return
2. Review your current finance facility terms — check extension options, exit fees, and any conditions tied to the trust structure
3. Recalculate project feasibility under the revised return assumptions, with trust reform impacts included
4. Communicate early with your lender if the project's cash flow timeline is likely to change — proactive disclosure is always better than a surprise at settlement

What This Means for MPFG Borrowers

MPFG Capital provides commercial loans and bridging finance to property developers and investors across Australia, including those who operate through trust structures. If proposed trust tax changes affect the economics of your project — whether you are mid-development, planning a new project, or need bridging finance between settlement and sale — MPFG can work with you to structure a funding solution that reflects the revised project parameters.

Non-bank lenders have a structural advantage in situations like this: they can assess each deal on its specific merits, rather than applying the rigid policy overlays that often cause the major banks to withdraw support when project structures change.

FAQ

Can property developers structured as discretionary trusts still access non-bank commercial finance in Australia?

Yes. Non-bank lenders assess applications individually and can work with trust-structured borrowers. The critical factors are demonstrating project feasibility under the revised assumptions and having a clear, credible exit strategy. Engaging a specialist non-bank lender like MPFG Capital early in the process is advisable.

What happens to my bridging loan if my development project faces delays due to trust tax changes?

Outcomes depend on your specific loan terms. Most bridging facilities include provisions for term extensions, though fees apply. Proactive communication with your lender before a deadline is essential — non-bank lenders generally have more flexibility than major banks in restructuring facilities when circumstances change.

How could the proposed discretionary trust changes affect housing supply in Australia?

Industry groups including HIA warn that if the reforms make development projects economically unviable, developers may cancel or defer projects — compressing the pipeline of new housing at a time when Australia already faces a structural supply shortfall across Melbourne, Sydney, Brisbane, and other capital cities.

This article is general information only and does not constitute financial or credit advice. All applications are subject to credit assessment by MPFG Capital (ACL 553698).