Trust or Company: Which Structure Should Your Fund Use to Borrow?

Introduction

The structure your fund uses to borrow money determines your personal liability exposure, which lenders will work with you, and how much you can borrow. Fund operators must weigh the limited liability of a proprietary limited company against the asset protection and income distribution flexibility of a discretionary trust.

This article compares trust and company borrowing structures in Australia across liability, regulatory obligations, and lending outcomes.

Interactive Tool: Find the Best Borrowing Structure for Your Fund & Assets

How Trusts & Companies Differ as Lending Vehicles

What Is a Discretionary Trust as a Lending Vehicle

A discretionary trust — commonly called a family trust in Australia — is a legal relationship governed by a trust deed, not a separate legal entity. A trustee (an individual or a company) holds and manages assets on behalf of a group of beneficiaries, with full discretion to decide how income and capital are distributed among them each financial year.

When a fund seeks to borrow money through this trust structure, the trustee is the actual borrower on the loan. The trust itself cannot enter loan agreements, sign contracts, or be sued because it lacks its own legal personality.

Most Australian lenders therefore require the trust to use a corporate trustee — a proprietary limited company created solely to serve as trustee — rather than an individual, as this provides clearer governance and limits personal liability for those behind the trust.

What Is a Company as a Lending Vehicle

A proprietary limited company (Pty Ltd) is a separate legal entity registered with the Australian Securities and Investments Commission (ASIC) and governed by the framework of the Corporations Act. It can own assets, enter contracts, incur debt, and borrow money in its own name, entirely distinct from its shareholders and directors.

Shareholders own the company through shares and generally benefit from limited liability — their personal assets are shielded from the company’s debts, with their risk confined to the amount they invested. Directors manage day-to-day operations.

Lenders and investors typically prefer this clear ownership structure because shares provide a straightforward way to assess credit, allocate equity, and enforce security.

Comparing Liability Exposure Across Trust & Corporate Structures

How Limited Liability Works for Company Borrowers

That separate legal personality creates a “corporate veil” that, in principle, limits shareholder liability to the amount they invested in the company. Personal assets of shareholders are generally shielded from the company’s business debts.

That protection is not absolute, however, and directors face several practical exceptions:

• Banks and lenders almost always require a director’s personal guarantee on business loans, which makes the individual personally liable if the company defaults.
• Directors can also be held personally responsible for debts incurred through insolvent trading.
• Under ATO enforcement powers, directors may receive Director Penalty Notices making them personally liable for unpaid PAYG withholding and superannuation guarantee charge obligations.

Asset Protection Through Trust Structures with a Corporate Trustee

A discretionary trust structure separates legal ownership from beneficial enjoyment in a way that offers strong asset protection. Trust assets are legally owned by the trustee and held for the benefit of the beneficiaries, who have no fixed entitlement to those assets. Personal creditors of a beneficiary cannot reach into the trust because the beneficiary does not legally own anything inside it.

Using a corporate trustee adds an additional layer of separation. A company established solely to act as trustee limits liability at the trustee level—any claim against the trustee is confined to the corporate trustee’s own assets, which are typically minimal. This arrangement creates a clear division between personal liabilities, trust liabilities, and the underlying trust assets, making it a sound approach for families seeking to protect wealth across generations.

How Your Vehicle Choice Affects Borrowing Capacity & Lender Access

Why Companies Typically Access a Wider Lender Panel

A Pty Ltd presents a clear ownership structure that lenders and investors understand well. Shares define who owns what, and credit assessors can evaluate the company’s financial position without needing to interpret a trust deed. This straightforward assessment framework translates into meaningful lending advantages.

Companies routinely access 40 or more lenders, with loan-to-value ratio (LVR) ceilings reaching up to 95% when supported by lenders mortgage insurance.

The flat corporate tax rate of 25% for base rate entities can also strengthen serviceability assessments, since after-tax profits may be retained within the company structure for future growth or reinvestment.

Trust Borrowing Challenges & Guarantor Requirements

Borrowing through a discretionary trust narrows the lender panel considerably. Lenders perceive trust applications as more complex, involving heavier documentation and intricate legal review than company applications — engaging private lending and non-bank finance lawyers early can help navigate these requirements. Trust loan applications often get referred to business banking departments, where processing is slower and borrowing capacity may be further limited.

The LVR ceiling for trust borrowers is typically capped at 80%, and lenders mortgage insurance is generally unavailable. Since a trust is not a legal entity, lenders require personal guarantees from:

• individual trustees;
• directors of any corporate trustee; and
• sometimes major beneficiaries or unit holders.

Trust debt can also reduce a guarantor’s personal borrowing capacity for future applications, even when the trust’s rental income is not given equal recognition by the lender.

Regulatory Obligations That Attach to Trusts & Companies

ASIC Registration & Governance Requirements for Companies

A Pty Ltd is registered with ASIC and governed by the Corporations Act. Registering a company involves paying an ASIC registration fee and adopting a company constitution that sets out governance rules.

Registered companies must meet ongoing compliance obligations each year, including:

• paying the ASIC annual review fee — currently $310 for a standard proprietary company;
• lodging an annual company statement;
• maintaining financial records; and
• keeping company registers up to date.

Directors also bear statutory duties that carry personal liability in certain circumstances, including responsibilities around insolvent trading.

Regulatory Considerations for Trust-Based Lending Arrangements

A family trust is governed by its trust deed and state-based trust law, not by ASIC, which means it avoids the annual review fee and reporting obligations that companies face. The trust deed is the central governing document — it defines:

• the trustee’s powers;
• the beneficiaries;
• distribution rules; and
• how changes can be made.

Trustee obligations are substantial even without ASIC oversight. The trustee must:

• prepare annual financial statements;
• lodge a trust tax return; and
• execute a valid distribution resolution before 30 June each year.

When a corporate trustee is appointed — a widely recommended approach for Australian trust structures — that trustee company becomes subject to all standard ASIC registration and governance requirements, including the annual review fee and director duties.

How Tax Outcomes Differ When Choosing Between Trusts & Companies

How CGT Treatment Differs Between Trusts & Companies

The CGT treatment of capital gains differs significantly between trusts and companies:

• Family trusts: Under Division 115 of the Income Tax Assessment Act 1997 (‘ITAA 1997‘), a family trust that holds an asset for more than 12 months can access the 50% CGT discount before distributing the gain to individual Australian resident beneficiaries. However, corporate beneficiaries do not receive this discount.
• Proprietary limited companies: A Pty Ltd receives no CGT discount at all, paying tax on 100% of any capital gain at the corporate rate of 25% or 30%.

This distinction has a material impact on fund returns where assets such as property or shares are held for long-term growth and later sold.

Income Distribution Flexibility & Why Tax Advice Is Separate

The way income is distributed and taxed also differs between the two structures:

• Discretionary trusts: A discretionary trust distributes pre-tax income to beneficiaries each year, allowing the trustee to stream profits to family members in lower tax brackets. The trustee must execute a valid distribution resolution before 30 June annually, or the trust’s income may be taxed at the highest marginal rate.
• Companies: Companies are taxed first at the corporate rate of 25% or 30%, with after-tax profits paid as dividends, which may carry franking credits. Private companies lending to shareholders must also comply with Division 7A of the Income Tax Assessment Act 1936 (‘ITAA 1936‘) to avoid a deemed dividend.

These rules apply differently depending on individual circumstances, so separate advice from a qualified accountant is essential before choosing a borrowing structure.

The Hybrid Approach to Combining Trust & Company Structures

Using a Corporate Trustee for Maximum Protection

A corporate trustee is a Pty Ltd established solely to act as trustee of a discretionary trust. This hybrid arrangement separates operating risk from the trust’s underlying assets, making it the preferred approach for Australian family-run lending and investment vehicles.

Any liability the trustee incurs remains confined to the trustee company, which typically holds little beyond its paid-up share capital. Lenders commonly require this structure before approving loans to a family trust. In addition, the trustee company bears its own ASIC annual review fee and director duties separate from the trust itself.

Holding Company Shares Through a Discretionary Trust

A widely used hybrid model for private lending funds involves a company operating the lending business while a discretionary trust holds the shares in that operating company. This approach combines the trustee’s ability to distribute income flexibly with the operating company’s limited liability and clearer access to borrowing.

Trust-held shares are legally owned by the trustee and are generally shielded from personal creditors of individual beneficiaries. Tax outcomes from this ownership structure depend on individual circumstances, so separate advice from a qualified accountant remains essential before adopting this arrangement.

Conclusion

Choosing between a Pty Ltd and a discretionary trust as your fund’s borrowing vehicle comes down to your liability exposure, lender access needs, and long-term growth plans. Companies unlock broader lender panels and loan-to-value ratios of up to 95%, while a trust with a corporate trustee delivers stronger asset protection and the flexibility to distribute income among beneficiaries.

A hybrid approach — using a company as trustee or holding company shares through a discretionary trust — often captures the benefits of both structures without unnecessary compromise. Reach out to GRM Law today to speak with our private lending and non-bank finance lawyers about a borrowing structure that protects your assets and supports your fund’s future.

Frequently Asked Questions

Disclaimer: This is general information only and is not legal advice. For advice on your circumstances, contact GRM LAW.