A trading trust is one of the most popular vehicles for conducting a small to medium-sized enterprise (SME) in Australia. This blog post describes the steps and documentation required for an SME to set up a trading trust in Australia.
What is the typical structure of a trading trust for an SME?
- Two persons decide to create a business together (the owners)
- Trustee structure: Incorporate a company and call it ABC Pty Ltd
- Shareholding structure: Issue shares for nominal value to owner’s family trusts
- Directorship structure: Owners to become directors of the trustee company
- Trust to be declared with nominal working capital ($50)
- Working capital to be loaned to the trading trust by the owner’s family trusts
- Owners to become appointors of the trusts
- The trust is a discretionary trust with decision-making required to be unanimous or in accordance with a shareholder’s agreement (bespoke)
What is the checklist for establishing a trust structure?
- Setup a trustee company (utilising your professional adviser or a shelf company provider)
- Identify who will control the trust and be its appointor
- Identify who will be the beneficiaries of the trust
- Owners to seek advice from their respective tax accountants regarding streaming of trust distributions
- Owners seek advice from their respective solicitors regarding specific items of the trust deed:
- Amendments to right to indemnity
- Exclusion of liability provisions
- The scope of power of a trustee to sell assets
- Powers of trustee to borrow monies
- Whether owners can demand a say in management and profit distribution
- The power of the appointors to replace the trustee
- Owners to seek advice from their solicitors regarding whether a shareholders or quasi-partnership agreement is required
How do you incorporate the trustee company?
In Australia, private companies are solely incorporated by the Australian Securities and Investments Commission (ASIC) (www.asic.gov.au). However, most companies are incorporated through shelf company providers that deal with ASIC. The shelf company providers incorporate the company, provide a company constitution, and also provide documentation to lodge registrations of an ABN and TFN.
Our firm uses Patricia Holdings (www.patricia.com.au) for our shelf company registrations due to the quality. Their current price for a shelf company with full documentation is in the order of $800 AUD. Patricia Holdings will also prepare a trust document for a discretionary trust for approximately $300 AUD.
What documentation is required to create the trust?
A trust is a relationship that is created through the trust deed, and this document may need to be evidenced in the future. The ATO or a liquidator may deem that a trust is not in existence if the documentation below cannot be evidenced when called upon. It is a good idea to have the trust documentation witnessed by a solicitor so that the solicitor keeps copies of the documentation on file for future reference.
The documentation required to establish the trust is:
- A company constitution for the trust company: The shelf company provider will include this document in the incorporation package with detailed instructions on adoption and execution.
- A trust deed: The trust deed must be signed and the settlor must also pay a nominal sum to the trustee (i.e. $50). Copies of the trust deed should be retained by the owners and this document may also need to be stamped for tax (depending on the place of domicile and the assets held).
- Minutes of a meeting of the trustee company to accept the appointment as trustee: This will usually be provided by the shelf company but it may need to be bespoke (i.e. prepared by a solicitor).
Mistakes that could burn you later
The following are a list of things to look out for that could cause you financial loss at a later date:
- If you set up multiple trustee companies and multiple trust deeds (there should only be one trustee company and one trust deed)
- Financial records of the trust should be prepared by a qualified accountant
- The minutes of the trustee company should be prepared by a solicitor
- The trustee company should not conduct business separately to the trust because it may cause confusion about assets and income actually held in the trust
- When land is purchased you should inform your solicitor that the company is a trustee so they can ensure proper declarations are made
- To minimise risk husbands and wives should not both be company directors of the trustee company at the same time
Further reading online about trading trusts:
- Read our blog posts:
- Read Worrells blog post on what not to do: Bad asset protection strategies (https://worrells.net.au/newsletter-articles/bad-asset-protection-strategies/)
- Read Pointon Partners’ 10 point checklist for asset protection (http://pointonpartners.com.au/asset-protection-general-checklist/)