Legal Tip 138: Advantages of a Corporate Trustee over an Individual Trustee

What are the advantages of a Corporate Trustee over an Individual Trustee


There are many advantages of having a company act as trustee of a trust, rather than a person act as trustee. Some of these are:

1. Liability

A trustee is personally liable for the debts of a trust. An individual trustee entering a contract will have their personal assets exposed. Where a company is trustee is liability is generally limited to the assets of the company – which will generally be ‘$2’.


2. Separation

A trust doesn’t exist as a person, the trustee is the relevant legal person – it is the one that has names on title, enters contracts, borrows etc. So there is often confusion over whether the assets owned by the trustee are trust assets or the trustee’s personal assets.


Where there is a company acting as trustee, and where that company does nothing other than act as trustee there is a clear separation for all to see.


3. Death

When a trustee dies the trust continues on under new control. This means the title to all trust assets need to be changed – land titles, bank accounts, share ownership registration etc. Where a company is trustee the title can stay the same and new directors can be appointed.


4. Lunacy


I was reading a will trust today and it had the word ‘lunacy’ in it. If a trustee loses mental capacity they can no longer act as trustee so the trustee needs to be changed. Changing trustee means changing title to the trust assets.


5. Passing Control

Say you have set up a trust and wanted to pass control to your kids. If you were the trustee you would have to change title to trust property. If a company were to be trustee the directors could be changed without any change in title needed.


6. Stamp duty

In some states, such as in NSW, changing trustee could result in stamp duty if the trustee is a beneficiary and the change results in persons falling into the class of beneficiary.


7. Privacy

There is an extra degree of privacy with a company as trustee. People searching for your name would not immediately find properties. They would have to go to an additional step of doing a company search to find out in which companies you have shares and/or are an office holder and then do a search to find out what these companies own. This simple little step stops a surprising number of people because they don’t want to spend the extra $30 or so!


8. Fines and Penalties

In some instances penalties can be less for companies. Example, for SMSF, breaches of the SIS Act will result in smaller amounts being levied for companies compared to individual trustees as each trustee is fined.


9. You cannot contract with yourself

But you can contract with a separate legal entity such as a trustee company which you may or may not control by being director and/or sole shareholder.


10. You cannot be the sole beneficiary and trustee

A trust by definition is where some holds property for someone else. It is a separation of legal and equitable ownership. So a person could not hold property as trustee for themselves. But a company which they control could – this is important for SMSFs as a SMSF with one member must have a company as trustee.


11. Borrowing

If there was a trust property with equity in it and the trustee’s personal circumstances had changes, such as a credit default or losing their job, it may be impossible for the trustee to borrow.


But where there is a company as trustee this probably can be easily overcome by placing a new director in and removing the old one. The banks will then lend based on the new director’s personal situation.


12. Borrowing II

With SMSFs many lenders reduce the LVR available to personal trustee SMSFs but will lend a higher amount to company trustees. I think there are even some lenders that will not lend to an individual trustee of a SMSF.


Downsides - For every up there is a down.


1. Companies cost money to run

There are annual ASIC fees of around $250. Accountant fees for nil tax returns, registered offices etc. (note the annual review fees by ASIC for a company that solely acts as trustee for a SMSF costs just $41 per year if it is a ‘special purpose company’.


Many people also forget to pay ASIC fees and then suffer another charge on top.


2. Companies Cost money to set up

A company needs to be established and legal advice should be obtained – ASIC and legal costs.


3. Legal Complexity

Company law is very complex and this applies to all trustees that are companies.


4. Easy to breach Corporations Law

It is very easy to breach the Corporations Act inadvertently.


5. Privacy

Under the corporations act all directors and shareholders personal details are available to be searched – including home address, place of birth, date of birth, full name etc.

 

13. Control

say one person controlled the trust, others could have some degree of control over this person by owning the majority of the shares of the trustee company.

A trustee cannot be controlled by others, but a director of a trustee could be.

 

What would be an example here Terry?

Why would you need to contract with the trustee? Development agreement? Loan?

 

Jmillar wants to lend money to the trust but jmillar is the trustee. At law jmillar would need to contract with himself which is not possible.

 

Downside 5 : SMSF issues

Major issues can occur with human trustee v's company trustee for a SMSF. Here are some I have experienced.

• Death and incapacity especially where no next of kin is easily ascertained and person dies intestate (no will)
• Death, marriage or divorce, adding new members etc may make the trust deed invalid to many parties. For example opening a new bank account. Deed says one member. But two trustees. CBA for example reject that. They want a Deed with two members + two trustees. Costly to amend for such a minor issue. Commsec has issues too.
• Borrowing. Many lenders (of those that remain) many require a Corporate trustee to avoid consumer lending laws. Costly to amend. Requires all fund assets to be transferred to new company name.
• Changes to members (+/-) require ALL investment names to be changed to that of all the trustees. Share registries charge a fee. Property is costly too and typically may need legal assistance.
• Sole member funds can have issues if the additional trustee (spouse) dies.
• Ownership of business real property concerns. Cannot be leased to yourself.
• Issues with related party limited recourse loans - ie death, contracting with self etc
• Estate planning risks eg recent decision in Marsella case.
• Custodian arrangements eg collectables etc
• Issues with temporary but enduring absence from Australia where the trustee is not ordinarily resident
• Complexity in compliance with s52(2)(g) covenant for fund assets to be legally owned and held separate from that of a member.
• UK ROPS (rollover from a UK pension scheme to a SMSF) is prohibited
• Personal liability to non member beneficiaries of another member AND their personal estate. Often not a concern but may be.

There is a benefit however but it is rare and exceptionally difficult to access. It is a stamp duty concession for inspecie transfer of real property to a SMSF from member/s. Complex state laws may exempt this and contribution limits may act as a barrier BUT highly complex concerns require legal advice to avoid a later tax trigger (eg NSW).

 

What are the typical costs setting up a trust with corporate trustee? Accounting and legal

 

About $1000 to $2500 plus gst

 

We have used a trustee company for our trusts to get around Item “9 - You cannot contract with yourself” a number of times.

 

So that mean if Person A & B (husband & wife) as trustees have a property then change the trustee to XYZ Pty Ltd where they both are directors, then they will pay full stamp duty in NSW again? Because usually a trust deed will include all family members and related entities as a broad definition as beneficiaries.

 

Depends on the finer details, prob not.

 

Ok. So stamp duty would only apply if XYZ Pty Ltd was already listed as a named beneficiary in the trust deed like a named beneficiary of a discretionary trust?

 

No

see s54(3) DUTIES ACT 1997 - SECT 54 Change in trustees

 

The bit that can be harder to address is satisfying the Commissioner. There are numerous schemes that can be played here to change beneficial ownership resulting after a change of trustee. Thats where legal advice is very important. Get it wrong and the transfer could be dutiable and then again trying to fix it. Most lawyers I have encountered with this issue tend to submit the draft deed amendments and docs to change trustee and seek a private ruling from the Commissioner before acting.

SMSF business real property transfers can be somewhat more complex too.

QLD has a range of strict issues with trust changes. Change the appointor, deed terms etc and it can result in transfer duty.

 

I've satisfied him before...