Financing for discretionary trust with corporate trustee

Just a quick question for the brokers on your experience of what banks require to lend to a corporate trustee of a discretionary trust. I have received conflicting information about whether the bank will accept a guarantee from just 1 director of the trustee (assume that it'll satisfy serviceability) or if they require all directors to give guarantees.

As I'm based overseas, I'm required to have a resident director in Australia. I have a family member who is happy to act as the resident director but where this will become an issue is if this resident director is also required to give a guarantee for the loan.

Thanks in advance all.

 

I have a discretionary trust with a company as trustee. My understanding is all directors are guarantors for the loan.

 

All directors would be required to give guarantees.

 

Yeah that's what my broker is saying as well. However, a friend over here is adamant that he has a loan with NAB where he's the only guarantor and his dad (the resident director) isn't required to be one.

It could be that he's just mistaken. He does work for another big 4 bank in the legal department though...

 

It is possible. Its really up to the bank what they require. Perhaps your friend may have a contact?

 

Like Terry said anything is possible if you have a business banker or personal banker able to make the decision on such things but through normal retail (branch) and broker channels for mere mortals the blanket policy would apply and all directors would have to be guarantors.

 

Would it be possible for the family member to resign as director, and then be reappointed after the finance has been approved? Would the family member automatically become a guarantor once reappointed?

 

Possible, but most loan agreements require the bank's permission to change directorships after the loan has settled.
There would also be a brief period where the company could become a non resident company with tax and corporations act consequences.

 

This issue indicates a serious tax concern for the trust.

Corporations Law requires one Director is resident at all times. However tax law requires that all the decision making for a trustee reside in Australia or the trust is not a resident. The central control and management must reside in Australian at all times. The normal way to address this is to appoint a resident Director under EPOA who must make all decisions. That can lead to all sorts of issues - Such as the guarantee problem.

I think you should seek tax + legal advice on this one. Its not a issue for a general tax adviser but a legal issue that needs a lawyer who is strong on tax. Legal docs will need to follow. Unfortunately too many people ignore the issue of company residence for a trust and a SMSF until too late when issues like this appear.

The bank may refuse to lend when their lawyers review it.

 

For a trust to be a resident, it requires the trustee to be a resident at any time during the year, not the entire time. Same deal with central management and control, its at any point during the year. s95(2) ITAA 1936.

As you mentioned Paul, quite a complex area and I would imagine that the lending side would have different requirements to the tax side.

 

Thanks all. Appreciate everyone's responses.

We have gotten advice from our accountant and mortgage broker, I was more interested in what the banks' practices were on the lending side as the requirement for guarantees from all directors is not a legal/tax question. We're aware that the the trust may be considered a non-resident and are OK with that.

From a commonsense point of view, the policy seems a bit strange that's all. If the bank would have been happy with just the single guarantee if the company only had 1 director, seems a bit strange that they would ask for multiple guarantors.

 

Yes spot on and my wording was not correct - My concern more that none of the year is what seems apparent. Many advisers think you have up to 2 years to fix it. However that exception can only apply to a SMSF.

I saw a client where the bank called in the loan as it breached a lending covenant. Lending is often where the problems are difficult to fix.

The CGT issues with going non-resident a worry (Event I2)

 

Banks are like casino's. The house sets the rules to make money.

 

Yeah agree, thing is there's should be no difference to the bank when they receive a guarantee from a sole director or from 1 out of 2 directors.

 

Agree Rolf. My point simply is that the bank would receive the same protection in both situations. Adding another director shouldn't halve the value of the guarantee.

 

Hi KDP,

I was just wondering if you ever managed to resolve this issue of getting finance through a discretionary trust with corporate trustee structure, without your 'nominal' Australian resident director having to give a personal guarantee?

I am facing exactly the same issue now. I'm an Australian citizen living in Hong Kong. A family friend is my 'nominal' Australian director to comply with the requirement to have one. She doesn't mind signing some papers now and again, but naturally doesn't want to sign personal guarantees for my investment debts.

As you say, the bank has exactly the same right to sue me on the guarantee as they would if I were living in Australia and doing this, or buying from overseas in my own name, so the extra director's guarantee doesn't really add anything for them. But the banks are pretty reluctant to deviate from the cookie-cutter requirements.

Would be great if you could let me know how you got on, or PM me if you prefer?

Thanks

 

I'd be keen to know as well as I had an inquiry very similar to this a few weeks ago. Perhaps is same person even..?

 

Hi Marty,

Yes, I think you are referring to my inquiry.

For others' information, I haven't managed to resolve it. Dropping the company structure and borrowing in a trust with an individual trustee improves the range of available lenders, but the trust needs to be Australian resident otherwise it falls foul of FIRB regulations (despite offshore Australian citizens being behind it). The only way to make the trust Australian resident would be to add an Australian resident trustee, which creates the same problem as the company structure.

For myself, I have a family member who is willing to do this for me, so that is how I am proceeding, otherwise I would be left with just buying it and borrowing in my own name - which loses all asset protection and is worse from a tax point of view.

If I find another way to resolve it I will post again - still happy to hear from anyone else who has any ideas.