How to create a corporate trustee

7 December 2022

To understand the benefit of a corporate trustee, we will first go through what a trust is in Australia as well as what the legal implications of a company are. A corporate trustee blends these two ideas together!

You might seek to appoint a company to act as a trustee of your trust. This entity is commonly known as a corporate trustee company. While it is possible to use an existing company as your corporate trustee, best practice is to register a new entity which is incorporated with the sole purpose of acting as trustee and has no historical liabilities.

What are the costs?

Individual trustee

Low set-up and management costs

Corporate trustee

Associated fees for registering a company and paying ongoing annual ASIC fees.

Lifespan and Succession Planning

Individual Trustee

If the trustee changes, they must execute a deed of appointment and transfer trust assets to the new trustee. This can be administratively onus.

Corporate Trustee

If directors or shareholders of the corporate trustee change, the corporate trustee remains the same legal entity. This means there is no need to transfer assets to another entity (unless the corporate trustee is no longer.

Liability

Individual Trustee

The trustee is responsible for the trust’s affairs and debts.

A trust is not its own separate entity. As a result, the trustee can be held personally responsible, and their personal assets are at risk to satisfy any of the trust’s debts/liabilities.

Corporate Trustee

Asset Management

Individual Trustee

It may be difficult to distinguish between personal and trust assets – particularly if records around asset ownership are unclear as to whether the individual holds the asset in their personal capacity or as trustee of the trust.

Corporate Trustee

Easier separation of trust assets and personal assets because they are held in different names.

Much the same as an individual trustee, a corporate trustee is tasked with carrying out the trust powers and managing the trust’s affairs for the benefit of the beneficiaries. The company holds the trust assets on the beneficiaries’ behalf. It is common for the person setting up the trust to be appointed as a director and shareholder in the trustee company. Consequently, they retain control over the trustee and can make decisions about the trust assets.

A corporate trustee company is recommended due to the greater level of asset protection it provides. In contrast with an individual trustee, a corporate trustee allows for greater separation of trust’s assets and the personal assets of the directors and shareholders. This clear distinction of assets can be important where the trust incurs debts it is unable to repay.

You would register the corporate trustee in the same way as any other company, with shareholders and directors. Importantly, although the shareholders and directors may be behind the decisions of the corporate trustee, they are not the trustee. The company itself takes up this role.

Corporate Trustees can be made for a Discretionary and Unit trust

What is a Discretionary Trust?

A Family Trust (also known as a Discretionary Trust) is one of Australia’s most common small business structures. It is ideal for families with private businesses and other income-generating operations.

Such trusts give trustees the discretion to decide who receives distributions, and how often payouts occur.

Discretionary Trusts are accepted in every Australian state and are relatively easy to establish and operate.

The roles in a Family/Discretionary Trust are:

Trustee

- Individual, or
- Corporate

Beneficiaries, and
Appointor

What is a Unit Trust?

A Unit Trust (also known as a Fixed Trust) differs from a Family Trust in that the trustee generally does not hold discretion over the distribution of assets to beneficiaries.

These structures divide the trust property into units, like shares of stock.

Each beneficiary (known as a "unit holder") owns a given number of those units, and at the end of each year, he or she receives a distribution from the trust, based on the number of units held.

This setup is ideal when multiple families are involved.

Unit Trusts operate somewhat like a company.

The roles in a Unit Trust are:

Trustee

- Individual, or
- Corporate

Unitholders

Company registration in Australia involves setting up a company as its own legal entity, which lets you conduct business throughout Australia.

You can also make use of other privileges, such as corporate tax rates or limited liability.

What are the requirements for company registration in Australia?

Step 1: Fill in a company registration form at Company123.

Step 2: Receive all company documents within minutes, sign and file.

Step 3: Receive ABN, TFN and GST registration (if necessary) and begin operations.

Benefits of Registering a Company

In Australia, the most common types of company are:

'Proprietary limited' companies (cannot raise money from the general public through share issues)
'Public' companies (usually formed to raise or borrow public money by listing the company's shares for trading on a stock exchange).

All companies are governed by the Australian Securities and Investments Commission (ASIC), which administers the Corporations Act 2001 (Commonwealth) and other legislation. Public companies must also comply with the rules of the Australian Stock Exchange.

Advantages of a company include that:

Liability for shareholders is limited. As a general rule company carries legal and commercial risk as a separate legal entity which is separate entity to the shareholders/directors that control the company.
It's easy to transfer ownership by selling shares to another party. Simple transfer forms can be completed to transfer the company shares to a new shareholder.
Shareholders (often family members) can be employed by the company with flexible income tax rules on distribution of income. Enjoy the use of tax credits company pays which may be passed on to shareholders (i.e no double taxation on company profits in the hands of shareholders in most cases).
The company can trade anywhere in Australia. A Private company can also trade in Overseas jurisdictions. Please consult your tax professional for additional tax advise.
Taxation rates can be more favourable than personal individual tax rates. Private companies currently enjoy a flat 27.5% tax rate where annual turn over of a company is less than $50m.
Enjoy access to Research & Development and Export Development Grant concessions which are generally available only to PTY LTD companies (not sole traders).

Advantages of a corporate trustee

Limited liability for individuals

Since the company is a separate legal entity, individuals gain the advantage of limited liability. This means that if there are any issues with the trust, the company is legally responsible, not the directors that are controlling it.

Easier separation of trust assets

With a corporate trustee, there can be an easier separation of trust assets and person assets, given they are held in different names. As a result, it is relatively straightforward to distinguish which of a person’s assets are part of the trust.

Greater asset protection

Since asset separation is more clearly designed, there is greater asset protection. If for example, a person gets sued, assets held in a separate trust with a corporate trustee are the company’s assets. Consequently, their personal assets will not be at risk.

Simpler succession

Through a corporate trustee, there is simpler succession and control of the trust in the event of death. Since a company cannot ‘die’. The company continues to act as trustee. If something happens to one of its directors, the corporate trustee must simply replace its director. The title to the assets would not change, so the trust’s assets do not need to be transferred in the case of the death of a director.

Disadvantages of a corporate trustee

The main disadvantages of having a corporate trustee include:

Additional set-up costs; and
Maintaining records for the entity.

Although it is possible to use an already registered company as a trustee, this is generally not recommended. It is best to register a new company to act as trustee, so that:

Its sole purpose is acting as trustee; and
There have been no activities undertaken to-date which may affect the company.

Though there are some additional costs and challenges associated with setting up a trust with a corporate trustee, the benefits of doing so often outweigh the disadvantages.

Suing a Corporate Trustee

Private companies are separate legal persons at law. Companies are not the directors or shareholders behind them. Even where there is a company with 1 shareholder who is also a director the company that company is a separate person to the director.

Companies can enter into contracts just like a person can. They can be sued in contract or in negligence just like a person can too.

Liability of a company generally is restricted to the company. The directors of the company are not liable for the company debt, except in 2 circumstances:

Because of legislation that makes them personally liable (such as trading while insolvent), and/or
Because of contract law - they agreed to make themselves liable for company debts by given a personal guarantee for example.

So where a trust is being set up it is a good idea to arrange for a company to act as trustee. This is very important where there will be a business operated, and is also important for where the trust will hold assets which carry risk. Real Estate carries a certain amount of risk as the owner of the property can be sued by tenants and others entering the property.

So where there is any risk having a corporate trustee can limit the liability to the company which is acting as trustee. If the trust is sued it will be the trustee that cops it - see my previous legal tip.

This is why the trustee should not own any other property other than trust property. The company will be a $2 company with no assets set up only to operate as trustee.

The assets of the trust will still be at risk though.

Corporate Trustee for Self-Managed Super Funds

Due to the strict requirements of a Self-Managed Super fund it may be advisable to set up a corporate trustee instead of having the members as trustees. The members of the trust must be directors of the trustee, however.

What is a Self-Managed Super Fund?

A self-managed super fund (SMSF) is a superannuation trust structure that provides benefits to its members upon retirement.

SMSFs differ from other types of funds by having the members of the fund also be the trustees.

SMSFs provide a range of investment options. Trustees can potentially access direct shares, high-yielding cash accounts, term deposits, income investments, direct property, unlisted assets, international markets, collectables and more.

The roles in an SMSF are:

Trustee

- Individual, or
- Corporate

Members

Comparison of member and trustee requirements for individual and corporate trustees (funds that have more than one member)

Individual trustees

Two to six members.
Each member of the fund must be a trustee, and each trustee must be a member of the fund.
A member cannot be an employee of another member – unless they are relatives.
Some State and Territory laws restrict the number of trustees a trust can have less than six. As an SMSF is a type of trust, it is important that clients seek professional advice to help understand if their SMSF is impacted by these restrictions. Alternatively, they could restructure or structure their SMSF to have a corporate trustee, where each member is a director of that corporate trustee (see below).

Corporate trustee

Two to six members
Each member of the fund must be a director of the corporate trustee, and each director of the corporate trustee must be a member of the fund.
Directors of corporate trustees need to have a director identification number (director ID).
A member cannot be an employee of another member – unless they are relatives.

Comparison of member and trustee requirements for individual and corporate trustees (single-member funds)

Individual trustees

There must be two trustees.
One trustee must be a fund member.
If the fund member is an employee of the other trustee, the fund member and the other trustee must be relatives.

Corporate trustee

The corporate trustee company can have one or two directors, but no more.
The fund member must be the sole director or one of the two directors.
Directors of corporate trustees need to have a director ID.
If there are two directors and the fund member is an employee of the other director, the fund member and the other director must be relatives.

Comparison of the costs associated with individual and corporate trustees

Individual trustees

There are no Australian Securities & Investments Commission (ASIC) fees, so establishment costs and ongoing administrative requirements are less.
A trustee cannot be paid for their duties or services as a trustee.

Corporate trustee

ASIC charges a fee to register a corporate trustee for the first time.
There is an annual review fee, which is lower if the corporate trustee acts solely as a super fund trustee, but higher if the corporate trustee also performs another function, such as running a business.
It's free to apply for a director ID.
A corporate trustee cannot be paid for its services as a trustee, and directors of the corporate trustee cannot be paid for their duties or services as directors in relation to the fund.

Comparison of ownership of fund assets for individual and corporate trustees

Individual trustees

If an individual trustee is removed or another added, you must change the titles of the SMSF's assets. This can be costly and time-consuming.
State government authorities may charge a fee for title changes.
Most financial institutions also charge a fee for title changes.

Corporate trustee

Recording and registering assets can be simpler, particularly for changes in membership.
When a person starts or stops being a member of the SMSF, they become, or cease to be, a director of the corporate trustee.
You must notify us, and ASIC of any change in director.
The corporate trustee doesn't change, so the titles of the SMSF’s assets are unchanged.

Separation of assets

The fund's assets must be kept separate from any assets members hold personally.

Comparison of the separation of assets for individual and corporate trustees

Individual trustees

Fund assets must be in the fund's name
Fund assets must not be combined with personal assets

Corporate trustee

Fund assets must be in the fund's name
Fund assets must not be combined with director's personal assets
Companies have limited liability, so a corporate trustee offers greater protection if the trustee is sued for damages

Penalties

Comparison of penalties for individual and corporate trustees

Individual trustees

If super laws are breached, administrative penalties are levied on each trustee
For example, for failing to prepare financial accounts and statements, each trustee is liable for a $2,220 penalty (10 penalty units). This would amount to $8,800 if there were four trustees.
The value of a penalty unit is $222

Corporate trustee

If super laws are breached, administrative penalties are levied on the corporate trustee
For example, for failing to prepare financial accounts and statements, a corporate trustee would be liable for a $2,220 penalty (10 penalty units)
The value of a penalty unit is $222
Penalties may be imposed if the directors of a corporate trustee do not have a director ID

Comparison of succession for individual and corporate trustees

Individual trustees

Where changes in trustees occur, the fund is not likely to continue to operate as usual unless an appropriate succession plan has been prepared

Corporate trustee

A corporate trustee continues in the event of a member's death
In the event of the death or incapacity of a member, control of an SMSF and its assets by a corporate trustee is more certain

According to ASIC, corporate trustees for SMSF companies are considered special purpose companies. ASIC sets out special rules for these types of companies.

What is a special purpose company?

A 'special purpose company' is generally one that's created for a set reason, not just general business. Special purpose companies are usually one of the following:

Superannuation Trustee Company

A superannuation trustee company acts solely as a trustee of a regulated superannuation fund. Refer to s19 of the Superannuation Industry (Supervision) Act 1993 for more information.

The company's constitution must prohibit the company from distributing income or property to its members.

Can I change the Trustee of my trust or Self-managed Superfund?

Discretionary and Unit Trusts as well as SMSFs can be amended.

Although Trust Deeds and SMSFs are technical and complex. The first place to start is to review the deed to see how to make these changes.

You can only amend the deed if the terms allow it. Consent may be required by a custodian, Appointor, or other party to amend the deed, and if consent is not provided then the amendment cannot be made.

We at company 123 can help you prepare a deed of variation for only $88. If you are interested to begin the process by visiting and completing our application here.

Other changes can also be made, which can be viewed in our website.

Please also provide a copy of your trust deed, as this is required during the process of amending your deed.

What have we learned?

Having a Corporate Trustee for your Trusts and Self-Managed Superfunds is far more advantageous over having individual Trustees.

Corporate Trustees have a greater level of asset protection, and it provides and allows for greater separation of trust’s assets and the personal assets of the directors and shareholders. This is because private companies are separate legal persons at law.

Trust Deeds and Self Managed Superannuation Funds can always be amended, should you wish to change your Trustee from an individual to a company.

Want to begin registering for a company? You can click HERE to register OR if you already have a company registered and would like to create a trust with a corporate trustee, you can begin the application HERE.

Should you have any questions you can call us on 03 9832 0660 or alternatively email us at support@company123.com.au.