Why use a Family / Discretionary Trust with a dedicated 'Sole Purpose' Corporate Trustee?
Who can you appoint as a trustee of your Family / Discretionary Trust?
The trustee of your Family / Discretionary Trust may be:
⚖️ One or more individuals; or
⚖️ A dedicated 'Sole Purpose' Pty. Ltd. Corporate Trustee incorporated under the Corporations Act Cth. (2001).
What is a Corporate Trustee?
A Corporate Trustee is normally a private (i.e. proprietary limited) dedicated 'Sole Purpose' Pty. Ltd. company incorporated under the Corporations Act Cth. (2001) with ASIC for the sole purpose of acting as the corporate trustee of your Family / Discretionary Trust.
What is meant by 'Sole Purpose'?
A trustee company, or in other words a Corporate Trustee is:
✅ Normally a private non-trading (that is, it does not deal with the public at large, so it is therefore not exposed to the many possible liabilities which arise when a business trades with the public) company;
✅ Which is incorporated under the Corporations Act Cth. (2001) solely for the purpose of being appointed to act as the sole trustee of a Family / Discretionary Trust.
Please Note: This does not mean that the Family / Discretionary Trust itself cannot deal with the public, it can and very often does trade.
When this happens the Trust is called a Trading Trust.
When the Trust only holds passive investments and does not deal with the public, it is called a Non-Trading Trust.
Why use a Family / Discretionary Trust with Corporate Trustee?
Advantages
The advantages of using a Family / Discretionary Trust with Corporate Trustee include:
✅ Limited Liability:
A Corporate Trustee is a separate legal entity incorporated under the Corporations Act Cth. (2001) and has the benefit of limited liability.
This means that the individual directors will not be held personally liable (excluding exceptional circumstances such as an instance of fraud).
✅ Separation of Assets:
Using a Corporate Trustee automatically ensures that trust assets are kept separate from personal assets as they are held in the company name.
To further strengthen this advantage, it is generally recommended that being the trustee of the trust is the sole purpose of the Corporate Trustee.
If the company also runs a business, such that it is trading with the public, confusion can be created regarding whether it is holding assets in its own name or on behalf of the trust.
✅ Reduction of Land Tax:
The higher the value of the property or properties held in an individual's name within the same state or territory, the more potential land tax is payable.
If each property is instead held in a separate Family / Discretionary Trust with a different Corporate Trustee, you can obtain the benefit of the land tax-free threshold for each property, and if land tax is payable, the lowest possible land tax rate would be applied.
✅ Simpler Administration:
No additional income tax return will be required for the Corporate Trustee, as it will qualify for non-active status with the ATO.
If there is a need in the future to change the control of the trust, having a Corporate Trustee will save you a lot of time, effort and cost.
In order to change control of the trust, it becomes a simple matter of preparing a share transfer form and/or a resolution to appoint or resign a director with the appropriate form being lodged with ASIC.
For example: Changing control of a Family / Discretionary Trust which owns real estate
When a Family / Discretionary Trust purchases a property, the property is held in the name of each trustee that is listed on the certificate of title "as trustee/trustees" rather than the name of the Family / Discretionary Trust itself.
If individuals are named as trustees, then when a trustee changes, a lawyer is required to be retained to effect the required updates to the certificate/s of title together with any associated mortgage documentation.
When there is a Corporate Trustee incorporated under the Corporations Act Cth. (2001) all that needs to be done is to prepare a share transfer form and/or a resolution to appoint or resign a director with the appropriate Form 484 being lodged with ASIC.
These changes can be made easily and at a nominal cost.
Even though the shareholders and directors of the trustee company may change, the trustee company will still remain as the sole trustee of the Family / Discretionary Trust.
This means that no change is required to the certificate of title/s or to any associated mortgage documentation.
When might the control of the Family / Discretionary Trust need to be changed?
Almost all trusts (which in Australia generally have a maximum term of 80 years: refer to this FAQ for more information) will need to effect a change of control of the Family / Discretionary Trust at some point in time.
Examples of when there is a need to change control of the Family / Discretionary Trust include:
⚖️ Your children take over your trust when you pass away;
⚖️ You change accountants/lawyers who have been acting as a professional trustee as you're not happy with their service;
⚖️ You change accountants/lawyers who have been acting as a professional trustee as you relocate within Australia or they close down or sell their business;
⚖️ You may need to change trustee if you move overseas;
⚖️ The death of any individual trustee (See below discussion: a Corporate Trustee incorporated under the Corporations Act Cth. (2001) does not die);
⚖️ Your marriage or relationship comes to an end.
✅ Simple succession: A corporate trustee incorporated under the Corporations Act Cth. (2001) does not cease upon the death of one of its directors.
Whereas if an individual trustee dies (in particular if they are the only remaining trustee) there will be legal costs + complications regarding the continued administration of the trust.
Disadvantages
The main disadvantage involved in using a Corporate Trustee incorporated under the Corporations Act Cth. (2001) with a Family Trust is the up-front + ongoing annual costs.
Incorporating a company incorporated under the Corporations Act Cth. (2001) can be done online, quickly and cost effectively using a service such as eCompanies (circa $550).
All companies have ongoing annual ASIC fees.
If the cost of incorporating and maintaining a dedicated 'Sole Purpose' Corporate Trustee is a prohibitive factor in deciding whether or not to form your Family / Discretionary Trust then you need to seriously consider whether it is worthwhile to form the Family / Discretionary Trust in the first place.
Credits:
This FAQ was created by James D. Ford GAICD | Principal Solicitor, Blue Ocean Law Group℠.
Important Notice:
This FAQ is intended for general interest + information only.
It is not legal advice, nor should it be relied upon or used as such.
We recommend you always consult a lawyer for legal advice specifically tailored to your needs & circumstances.