By Wisewould Mahony
September 9, 2016
Of the various corporate structures available, trusts are often recommended as they can provide asset protection and reduce the amount of tax payable.
The most common types of trusts are Unit Trusts, Discretionary Trusts and Testamentary Trusts.
When establishing a trust, the parties must appoint a trustee. The trustee can be an individual or a company. The trustee of a trust owes duties under legislation and common law to the trust. In certain circumstances, for example a breach of those duties, the trustee is personally liable to the trust.
When deciding whether the trustee of a trust should be a company or an individual it is relevant to consider whether the legal principle of separate legal entity shields the director of a trustee company (Trustee Director) from liability in the event of breach of trust.
The trustee of a trust (either an individual or corporate trustee) owes Common Law duties to the trust.
These duties include:
A trustee company and the Trustee Director will owe the above listed duties to the trust. The Trustee Director will owe these duties over and above their ordinary director’s duties under the Corporations Act 2001 (Cth) (Corporations Act).
A trustee also owes fiduciary duties to the beneficiaries of the trust. A fiduciary cannot have a conflicting personal interest or conflicting duty owed to a third party and cannot profit from his or her position as a fiduciary.
It is therefore the responsibility of the Trustee Director to ensure that the trustee company complies with these fiduciary duties.
Certain trusts are subject to specific legislation. SMSF’s are subject to the Superannuation Industry (Supervision) Act 1993 (SIS). The SIS Act imposed additional obligations for Trustee Directors of SMSF’s which include the duty to:
A Trustee Director of a SMSF must also ensure compliance with the sole purpose test, the relevant investment strategy and understand the regulations surrounding member contributions and the proper administration of the SMSF.
In addition to any consequence and penalty for breach of director’s duties, a director of a trustee company may be personally liable for liabilities incurred by the company as trustee of the trust under section 197 of the Corporations Act.
The personal liability of a Trustee Director may extend to the insolvency of the trustee company where:
Directors have personal liability for a company’s unpaid PAYG withholding and Superannuation. This personal liability applies equally to a company acting in its own right and a company acting as trustee of a trust.
Trustee Directors are not shielded from their obligations to the trust through the imposition of a trustee company. While there are a number of benefits of having a company as the trustee of a trust, the Corporations Act and Common Law protect beneficiaries from the deliberate wrongdoing of Trustee Directors. In those circumstances, Trustee Directors may find themselves personally liable.
If you are appointed as the director of a corporate trustee of a trust, it is therefore important that you understand your duties.
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