BUSINESS FACTSHEET: DISCRECTIONARY TRUSTS: INDIVIDUAL VS CORPORATE TRUSTEE

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DISCRETIONARY TRUSTS:INDIVIDUAL OR CORPORATE TRUSTEE?BUSINESS TAX FACTSHEET

Discretionary trusts provide a lot of benefits from a tax perspective but should you appoint an Individual or a Corporate Trustee? Discretionary trusts provide a valuable vehicle for

managing assets in a legal structure such as a family

office, SMSF, or business, allowing income to be

distributed to beneficiaries in a flexible, tax-effective

way. We are often asked about the differences

between the appointing an individual vs. corporate

trustee when we set up entities for our clients and

whether a corporate trustee is worth the up-front

and management costs.

The key difference between individual trustees and

corporate trustees is how much exposure you are

willing to have to risk and responsibility for potential

liabilities within the trust, as well as the flexibility

afforded for changes in the trust. Whilst a corporate

trustee may incur higher up front and management

costs, our view is that the benefits and protection it

offers to members of the trust are worth considering.

What is a discretionary trust? A trust is the relationship between the legal owner of

property and other assets and the beneficial owners

of the property and assets within the trust (i.e. the

beneficiaries).

In a discretionary trust, the trustee has flexibility on

how to distribute income and capital to beneficiaries,

which must be documented and governed by terms

of the trust deed.

As a trustee is the legal owner of all assets held in

a discretionary trust, its name must appear on all

legal documents. The trustee is also responsible for

managing the day-to-day affairs of the trust.

Why use a discretionary trust? Discretionary trusts have a number of advantages,

for example:

• Flexibility: Trustees can determine how income

and capital are distributed to beneficiaries.

This can change from year to year. The capital

gains discount can also pass through trusts to

individual beneficiaries.

• Tax effectiveness: Tax minimisation is possible

as income from the trust can be distributed to

beneficiaries on lower marginal tax rates and

therefore reducing the amount of tax paid by

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beneficiaries.

• Asset Protection: Assets in a trust are protected

from creditors and provide the ability to control

assets across generations (provided you have a

corporate trustee).

• Investment structure: A discretionary trust can

be an appropriate structure for investments and

trading, for example, as a business.

Deciding on a trustee: Should you have an individual or corporate trustee?

Many trusts opt for individual trustees due to the

lower up-front costs and management costs over

time, however the primary benefit of a corporate

trustee is asset protection.

If the trust is likely to be exposed to investment,

business, or other types of risk, considering how

to protect both members and the trust’s assets

held becomes more important. The table right

shows some of the key differences for individual vs.

corporate trustees:

Requirement Individual Corporate

Debt Liability or shortfall

Individuals will become liable for liabilities or shortfalls in assets in the trust (e.g. if the trust trades at a loss)

As a separate legal entity, there is limited liability for directors in the event of a shortfall in assets.

If that occurs, then the company can be put into liquidation and individual shareholders are not liability for the debts of the company (there can still be director liability but this can also be limited).

Separation of asset ownership

Challenges may arise distinguishing personal vs trust assets

Easier distinction between trust and personal assets as they are owned in different names.

This protects the personal assets of directors

Death or change of trustees

Assets need to be transferred to a new trustee.

Deed of appointment required

Simpler succession and control of the trust in the event that one of the entity’s directors dies.

If a new member of the trustee company is added, it’s a straightforward exercise to appoint a new director/shareholder to the company and notify ASIC.

SMSF Considerations

Minimum 2 and Max 4 Trustees

Asset risks as mentioned above may be amplified if the SMSF defaults on repayments on property held in the trust.

A corporate trustee provides the benefit of limited liability so that in the event of the trust incurring any liability, individual directors are unlikely to be held personally liable (though there are exceptional circumstances)

Costs Lower setup and management costs as there is no need to set up a company

Upfront cost for set up, requirements for reporting and higher costs for ongoing administration

Talk to your accountantIn weighing up the pros and cons of individual

trustees versus corporate trustees, an accountant

can help you to look at both options in the context

of your current circumstances, risks, estate planning,

tax and superannuation.

Last updated May 2017. This factsheet is provided for

information purposes only and is correct at the time of

publishing. It should not be used in place of advice from

your accountant. Please contact us on 02 9957 4033 to

discuss your specific circumstances.

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About usOur Expertise

Domestically

Bates Cosgrave advises domestic and

international businesses.

We provide highly personalised services

across a wide range of industries with in-depth

knowledge in real estate, renewable energy,

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Internationally

Although we are a boutique firm based in

Sydney, we have access to a strong global

network and specialise in advising cross-border

transactions and global structuring.

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Matt joined Bates Cosgrave in April of 2007 as a

manager and was promoted to Director from 1

July 2009. Matt has a reputation for his technical

expertise and experience in specialist advice

to professionals including medical doctors,

professional investors and family offices,

multinational companies.

His diverse knowledge on International tax,

expatriates tax, employee share schemes,

business structuring including cross border issues,

CGT and GST is formidable.

His industry knowledge is broad and includes

medical services, real estate, pharmaceuticals and

technology companies. As tax advisors, we must

think ahead and consider not just the current

situation but the future.

Good advice reflects not simply value now, but

lasting value.

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GLENn COSGRAVE

Glenn is passionate about business improvement

and works with our clients to get the fundamentals

of their business right, serving as a mentor

through their business journey of establishment,

growth and exiting when the time is right. His

approach has helped many businesses evolve

from start-up to commericalisation and ultimately

setting up their business in the best possible

position for sale.

Glenn’s extensive experience as a strategic

advisor ensures his clients have a clear focus

for their personal and business goals, including

a roadmap for future success and alignment of

multidisciplinary advice to achieve best outcomes.

Glenn is also a professional adviser to engineers,

valuers, project managers, accountants, lawyers

and high net worth individuals, with a strong

portfolio of clients in import and distribution,

professional advisory and innovative businesses.

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Bates Cosgrave

Chartered Accountants

Ground flour, 123 Walker Street

North Sydney NSW 2060

PO Box 497

North Sydney NSW 2059

P: +61 2 9957 4033

F: +61 2 9964 0610

E: enquiry@batescosgrave.com.au

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