Incorporate a company as trustee of a Family Trust

Company as trustee for a Family Trust

A company used as a trustee is called a ‘corporate trustee’. A ‘corporate trustee’ is only the ‘legal’ owner. It is not the ‘true’ owner. Instead the the ‘true’ or beneficial owner is the Family Trust.

In Australia, a company is commonly trustee for a:

• Family Trust
• Unit Trust
• Bare Trust
• Self-Managed Super Fund

E.g. Smith Pty Ltd as trustee for the Smith Family Trust

Company trading in its own right

The opposite of a ‘corporate trustee’ is a company that trades in its own right. In this instance, the company is both the legal and beneficial owner of the assets. If the company buys shares on the stock exchange, property or business then the true owner is the company.

Do corporate trustees get an ABN or TFN?

When you operate a business in Australia you apply for an ABN and TFN.

However, a corporate trustee does not need an Australian Business Number (ABN) or a Tax File Number (TFN). A corporate trustee has neither an ABN nor a TFN. This is because it, itself, does not trade. The corporate trustee has no ‘beneficial’ interest in the assets it holds for the trust. The corporate trustee merely holds the assets for the ‘true’ owner – the Family Trust.

Therefore, instead, the Family Trust gets the ABN and TFN.

The corporate trustee does not do tax returns. This is because it does not own beneficially any assets. For tax purposes, the corporate trustee owns no assets.

Why have a company as trustee of your Family Trust?

Running a business – any business – is high risk. Business owners want asset protection. To reduce risk you separate, as far as you can, the business from the individual. One method to do this is to trade through a Family Trust with a company as the trustee. This is called a ‘Family Trust with a corporate trustee’. It is a low cost and effective way of carrying out asset protection.

Build a corporate trustee first. And then build the Family Trust.

1. Build the company first.
2. The sole director is the person of straw (has no assets in their name).
3. The sole director holds one share worth $1.00 ‘as trustee’ for the ‘yet to be built’ Family Trust. Or, if you have a spouse, then the Director holds no share, instead, the Spouse is the one and only Shareholder and holds one share worth $1.00.
4. Wait for us, as your lawyers. We check and incorporate the corporate trustee.
5. Once incorporated:
   1. your company name is now confirmed and owned by you;
   2. you get your own Australian Company Number (ACN).
6. Armed with the company name and ACN you build the Family Trust Deed.
7. Now build the Family Trust Deed on our website https://www.legalconsolidated.com.au/family-discretionary-trust-intro/
8. The Trustee of the Family Trust is your new company.
9. The Appointor of your family trust is you and your spouse. Your children are your Back-up Appointors. But, if you have no children then your spouse is the Appointor and you are the Back-up Appointor. But, if you have no spouse then you are the Appointor and your mum is the Back-up Appointor. (But be careful if your Mum is on Centrelink.)
10. Your Family Trust registers with the ATO an ABN and Tax File Number (TFN). They are free. Our covering letter that comes with the Family Trust Deed tells you how to do this. Your company (while owning the assets as trustee) does not trade, therefore, your company does not require a TFN or ABN. The corporate trustee does not file tax returns as it does not trade in its own right.

Who owns the shares of a corporate trustee?

Since the corporate trustee:

1. has no assets (other than the $1.00 paid-up capital); and

2. can be sacked by the Appointor of the Family Trust anytime

it is usually not that important as to who owns the shares in the corporate trustee.

Traditionally:

1. if you have a ‘safe’ spouse (not involved with the business) then your spouse owns the $1.00 share (in that case the director – the sole director – is not a shareholder).

2. Don’t have a spouse or your spouse is also high risk (e.g. you are both medical doctors or both contractors, rather than just an employee)? Then you (as the director) hold the one $1.00 share in trust for your (yet to be formed) family trust.

We check your company before we register it with ASIC.

Incorporating a company with ASIC is important.

Our company and constitution comply as a:

1. trustee of a family trust, unit trust and bare trust

2. trustee of Self-Managed Superannuation Fund

3. crowd-sourced funding vehicle

4. entity to operate a business  in the company’s own right

Restricting company name

As you build the company, check if your preferred company name is available.

However, ASIC prohibits in your company name:

‘bank’
‘trust’
‘royal’
‘incorporated’

Also, ASIC does not let you use words to mislead people about a company’s activities. Links to the Government, the Royal Family and ex-serviceperson groups are prohibited.

ASIC also refuses offensive and illegal names in a Pty Ltd company.

Abbreviations in Pty Ltd company name

ASIC allows these abbreviations in a corporate trustee:

• and: &
• Australian Business Number: ABN
• Company: Co, Coy
• Proprietary: Pty
• Australian: Aust
• Proprietary Limited: Pty Ltd

Constitution vs replaceable rules

Corporate trustees as trustee for a family trust are governed by:

* a constitution (recommended), or
* replaceable rules (dangerous and not recommended)

‘Replaceable rules’ (from the Corporations Act 2001) provide a basic set of rules for your company. They are not good. Few accountants, lawyers or advisers recommend them.

Replaceable rules are less than the bare minimum. There are additional powers that a company should have. These are only found in a constitution.

Replaceable rules change at the whim of the current government. Such changes may benefit ‘society’. But they may not be in the best interests of shareholders. In contrast, shareholders amend constitutions anytime.

Our Company Constitution contains:

* Cutting edge pre-emptive rights. Profesor Bett Davies’ Doctorate was on business succession planning 
* tag along requirement’ forcing minority shareholders to also sell their shares together with majority shareholders
* accountant friendly, GAAP compliant valuation powers
* profit distributions, even when there is no ‘profit’ for ATO purposes
* over 30 different classes of shares
* allowing Directors and shareholders to use Skype and other online facilities
* built-in Division 7A Loan Deeds

Use the company for just one purpose

You are married, captain of your football club, an employee and president of your local Rotary Club. All at the same time. As a human being you ‘wear many hats’. You hold more than one job.

Similarly, a company can wear many hats. It can carry out many jobs all at the same time. It could be trustee of many Family Trusts. It can also be the trustee of an SMSF. It can also beneficially own a business. It can legally do all of those jobs at the same time.

A company costs money to operate. You pay ASIC a yearly fee. However, best practice is to have one company just do one job. 

Save money having the Pty Ltd carry out many jobs?

Consider asset protection.  What if one of the family trusts goes insolvent? Often the corporate trustee goes down with the failed family trust. What if that company was also the trustee of other family trusts? Do the other family trusts also fail? 

Usually not. Usually, the right of indemnity of a trustee is limited to the assets of the trust for which the liability is incurred. If your company is a corporate trustee for multiple trusts, a claim or liability for one trust does not normally expose the assets of the other trusts. In a perfect world, there is no cross-contamination.

But we do not live in a perfect world. You must establish the beneficial ownership of particular assets to the liquidator’s satisfaction. Often you may own shares and real estate without there being a clear statement as to who is the beneficial owner. Maybe the failed family trust had beneficial ownership – it is up to you to prove otherwise.

While your company wears more than one hat, make sure that each trust has clearly segregated assets. 

It is often, in the long term, better to have a separate company for each family trust. It reduces confusion.

Land tax, depending on where the real estate is, may also be less with different Pty Ltd corporate trustees. 

Why use Legal Consolidated to build a Pty Ltd corporate trustee?

The 7 advantages of using Legal Consolidated Barristers & Solicitors:

1. 94% of incorporations happen within 25 minutes of you building the company online
2. our lawyers personally check the details before submitting to ASIC
3. as required, we contact ASIC to confirm your company name
4. company name is unavailable or challenged by ASIC? We contact you via telephone and help you find one that is available
5. you receive a secure, personalised email containing
   • Certificate of Incorporation
   • Company Constitution
   • All minutes
   • Letter on our law firm’s letterhead
6. our hints and training videos guide you. The law firm is available 24/7 via telephone for legal advice on how to build your document
7. a constitution is a deed. Only a law firm legally prepare deeds.

For more legal advice telephone us. 

Adj Professor, Dr Brett Davies, CTA, AIAMA, BJuris, LLB, Dip Ed, BArts(Hons), LLM, MBA, SJD
Legal Consolidated Barristers and Solicitors

National Australia law firm
Mobile: 0477 796 959
National: 1800 141 612
Email: [email protected]