In an article written by Sue Prestney FCA published in the ICAA Public Practice Program* she describes a true story of how a married couple went about investing their savings through a badly set up corporate structure and how they virtually lost everything. Following is a brief description of this couple’s devastating financial story and the lessons we can all learn from it.

Joe a marketing manager for an international company and Jenny his wife had saved some money and sought advice on how to invest it. Their accountant set up a family discretionary trust allowing them to invest funds through that structure. In agreeance with their accountant, Joe and Jenny did not set up a corporate trustee for that trust to save some money on set up costs.

Initially Joe and Jenny invested their funds into acquired listed shares and term deposits. Down the track Jenny’s brother Harry and sister Celia asked Joe and Jenny to invest into their failing but very lavishly fitted out restaurant business. Joe and Jenny loved the restaurant and were happy to invest some of their funds.

Overtime, the restaurant business could not generate sufficient income to cover the overheads and service the debts to the bank. The restaurant’s debts continued to grow until ultimately the bank took action. Harry and Celia became bankrupt and the taxation office and landlord sued the partners of the business for the unpaid PAYG withholding and rent.

An important note is that Harry and Celia had established a discretionary trust, with companies as trustees, which formed a partnership to operate the business.

As partners, the trustees of the three discretionary trusts were jointly and severally liable for the debts of the business. Harry’s and Celia’s trusts had company trustees which had no assets other than $12 of issued capital. However, Joe and Jenny were still the individual trustees of their trust and were therefore personally liable for the debts of the trust. As a result, the full burden of the business debts fell on them as the only partner with assets.

In order to avoid bankruptcy Joe and Jenny had to sell their trust’s investments and the Australian Taxation office garnisheed Joe’s salary to discharge the remaining PAYG withholding debt.

Lessons learnt from this real life situation:

  • An individual trustee is only ever appropriate when investing in passive investments.
  • Joining a partnership is never a passive investment.
  • Seek out professional advice when deciding where to invest trust money.
  • Saving a few hundred dollars on some professional advice and setting up a trustee company could end up saving you a whole lot more.

If you require professional advice on setting up trusts and investing please contact us on 03 9081 0400.

*Institute of Chartered Accountants Australia, Public Practice Program, Case Studies