Private trusts and private company liabilities

Last updated: 
23 January 2020

This page explains the effect of private trust and private company liabilities on the assessment of income support pensions or payments.

From 1 January 2002 the rules relating to private trusts and private companies changed. If you are the controller of a private company or a private trust, the income and assets of that entity may be assessable for pension or payment purposes.

Definitions

The following terms are used in this page. The terms are set out below:

Attributable Stakeholder

An attributable stakeholder of a private trust or private company is a person(s) who from 1 January 2002 may be attributed with the income and/or assets of a private trust or private company. Attribution is determined based on:

  • Whether the person has such a relationship with the company or trust that allows for effective control in relation to it;
  • the value and effect of contributions to the company or trust and if consideration was received for the contributions;
  • whether the person has received adequate distribution of capital or income from the company or trust to reflect their interest;
  • whether future distributions are expected;
  • the person receiving any other benefit from either the income or assets of the trust or company;
  • whether the person is an attributable stakeholder in another trust or company under the Veterans’ Entitlements Act 1986 (VEA) or the Social Security Act 1991; and
  • any other circumstances that affect the involvement of the individual with the activities or the administration of the trust or company.

Associates

Associates are family members, or other persons or organisations that could be expected to act in accordance with the directions, instructions, or wishes of the controller.

What is a liability?

A liability exists where a legal obligation occurs. Liabilities can include loans that have been made to a private trust or private company, or debts owed by a private trust or private company, where the entity is legally obliged to repay the debt or loan.

Liabilities (loans or debts) of a private trust or private company may not necessarily be recognised or allowed as a liability of a trust or company for pension or payment assessment purposes. The effect of non-recognition is that the net asset value of the entity will be increased for pension or payment assessment purposes.

To be a recognised liability a loan must be an actual lending of money or an asset of a particular value, to a trust or company and there must be a clear intention by the trust or company to repay the debt.

If a loan by an individual to an entity is not recognised as a genuine loan, then the deprivation provisions could apply. For more information on deprivation, refer to Giving Away Income or Assets.

Recognised liabilities

Loans to, or debts owed by, a private trust or private company will be recognised if:

  • they are made under a written agreement signed by all parties to the agreement and witnessed by a third party (please note: associates are not considered third parties); and
  • they are made on a commercial basis (see below); and
  • the decision maker is satisfied that the loan has been made on a commercial basis; and
  • They are not made by a person who is under 18 years of age.

The value of a loan, regardless of if the loan is recognised as a liability of an entity or not, will be considered a personal financial asset of the lender and is subject to deeming.

Commercial loan

When determining if a loan has been made on a commercial basis a range of factors will be considered, including:

  • interest rate;
  • the duration of the arrangement;
  • the relationship between the parties to the arrangement;
  • whether there is a clear intention to repay; and
  • the history of repayments.

*Note: - Reasonable interest paid on loans will be accepted as a genuine deduction from the income of the private trust or private company. The current commercial interest rates would be regarded as reasonable.

Secured loans

Loans secured against a specific asset(s) of a private trust or private company generally can only be offset in relation to the asset(s) against which the loan is secured.

*Note: - This is important particularly when there are exempt assets such as a person's principal residence included in the private trust or private company assets. If the loan is secured against all the assets of the private trust or private company the loan must be apportioned before determining the net attributable asset amount.

Liabilities that are secured against assets that are not part of the assessable entity assets are also not recognised as liabilities.

Loans by a trust to an attributable stakeholder

A loan by a trust to an attributable stakeholder may have an unforeseen consequence. The loan becomes an asset of the trust, however it cannot be offset by the borrower (stakeholder) unless it is a secured loan, or unsecured, but recorded in writing and witnessed by an independent third party.

If the loan cannot be offset, the amount is maintained twice – once as an asset of the family trust and again as an asset of the stakeholder borrower.

Irrecoverable liabilities

A loan or debt that is legally irrecoverable cannot be taken into account since it has no value. A loan or debt may become irrecoverable through the operation of the Statute of Limitations as enacted in each State, or through the inability of the debtor to repay when legally required. A loan is not irrecoverable merely because there is no documentation of the loan agreement.

The fact that a debtor does not have sufficient liquid assets to repay a loan does not automatically mean that the loan is legally irrecoverable.

Liabilities in respect of attributable stakeholders

The following table sets out the rules relating to loans to a private trust or private company made by the company controller or attributable stakeholder.

    Written Commercial Loan Agreement No Written Commercial Loan Agreement
1 Liability to third party (eg bank, finance company or non associate) Recognised as liability for entity. Not recognised as liability for entity.
2 Liability to associate (who is not a controller) Recognised as liability for entity. Not recognised as liability for entity.
3 Liability to sole (i.e. 100%) attributable stakeholder Recognised as liability of entity. Financial asset of controller and deemed.
4 Liability to part (e.g. 33%) attributable stakeholder Recognised as liability for entity. Financial asset of part controller and deemed. Not recognised as liability for entity. Financial asset of part controller and deemed.
5 Liability to a minor (under 18 years of age) Not recognised as liability for entity. Financial asset of minor & deemed.