A family trust can borrow money in Australia, and for many small business owners that is exactly how the business gets funded. The equipment, the fit-out, the working capital line, even the purchase of premises can sit inside the trust and be paid for with borrowed money. But the loan does not work the way it does for a company or an individual, because a trust is not a legal person. It cannot sign a contract, it cannot be sued, and it cannot hold a bank account in its own right. Everything happens through the trustee.
This guide walks through the mechanics of trust borrowing: who actually takes out the loan, what the trust deed must allow, what lenders ask for, how security works on the Personal Property Securities Register (PPSR), what happens when the money comes from a related party, and where the personal exposure sits if things go wrong. Most of the risk in trust borrowing is not in getting the loan approved. It is in getting the structure and the paperwork around it right.
Who is involved when a family trust borrows
Before the money moves, it helps to map the roles:
- The trustee: The only party with legal capacity. The trustee signs the loan and security documents, takes on the debt, and applies the funds for trust purposes. It can be an individual, but in practice it is usually a company.
- The lender: A bank, non-bank lender or private lender. It assesses the trustee, the trust's financial position and the security on offer, not the beneficiaries.
- The beneficiaries: They do not contract with the lender. Their entitlements matter later, when the trust repays the debt and distributes what is left.
- The directors: If the trustee is a company, the directors decide whether to borrow and can be personally exposed in some situations.
- The advisers: An accountant for the tax consequences of moving money, and a lawyer for the deed, the loan documents and the security.
The trustee is the borrower, not the trust
The starting point is that the loan is the trustee's debt. In Carter Holt Harvey Woodproducts Australia Pty Ltd v The Commonwealth [2019] HCA 20, the High Court confirmed the underlying position: trust assets are not the property of the trustee company, even though the company controls them. The company acts in a representative capacity, and the assets remain subject to the interests of the beneficiaries.
That split creates the core dynamic of trust borrowing. The trustee contracts with the lender in its own name and is personally liable on the loan. In return, the trustee has a right to be indemnified out of trust assets for liabilities properly incurred in administering the trust. Properly incurred means within the trustee's powers under the deed and for the trust's purposes. So a lender that lends to the trustee ultimately looks to the trust's assets to be repaid, through that right of indemnity, rather than to the beneficiaries personally.
Two qualifications matter here. First, the indemnity is not automatic in every case. If the trustee borrows outside its powers under the deed, or for a purpose the deed does not authorise, the right of indemnity can be lost, and the trustee is left to pay from its own pocket. Second, lenders sometimes agree that a loan is "limited recourse", meaning the lender's recovery is confined to the trust assets and the trustee's indemnity, with no call on the trustee's own assets. That is a negotiated term, not something a lender offers as a matter of course.
The trust deed comes first
The trustee's power to borrow has to come from somewhere, and that somewhere is the trust deed, together with any amendments. Before approaching any lender, check what the deed actually allows. The powers to look for are:
- Borrowing: an express power to borrow money and enter into finance documents
- Security: a power to charge or mortgage trust assets, or grant security over them
- Guarantees: a power to give guarantees and indemnities, which matters when a group of entities borrows together
- Execution: a power for the trustee to execute documents on behalf of the trust
Modern professionally drafted deeds usually contain all of these. Older deeds, or do-it-yourself deeds, often do not, and some restrict borrowing or security deliberately. Lenders routinely ask to review the deed as part of credit approval, and a lender that cannot find a borrowing power may simply decline the application.
Where a power is missing or restricted, the fix is a deed variation before you apply, not after. This is a task for a lawyer, because the variation must be made in the way the deed itself requires and must not accidentally disturb the trust's tax status or the beneficiaries' entitlements.
What lenders require
Every lender is different, but a small business borrower using a family trust should expect the following.
A corporate trustee
Many lenders prefer that the trustee be a company. It gives cleaner separation between business risk and personal assets, and it simplifies enforcement if things go wrong. Individual trustees can still borrow, but lenders may be more cautious about the paperwork and the security. If you have individual trustees and plan to borrow, it is worth discussing a change to a corporate trustee before you apply.
A security package
Business lending to a trust is usually secured by a General Security Agreement (GSA) over the trust's assets, often combined with:
- Specific security: for example, equipment finance over the machine being bought, or a mortgage if real property is involved
- Personal guarantees: from the directors, or from the adults who control the trust
Personal guarantees deserve particular attention. A guarantee puts your personal assets, including your home, at risk if the trust defaults. Lenders will often ask for them from the directors of a corporate trustee precisely because the trust structure otherwise gives them limited recourse to the individuals behind it. Before signing, understand what triggers payment, whether the guarantee is capped, and how it interacts with the security over trust assets.
Serviceability evidence
Lenders assess whether the trust can service the debt. Expect to provide up-to-date trust financial statements and tax returns, cash flow forecasts, and evidence of revenue such as contracts or purchase orders. Where the trust has a short trading history, lenders lean more heavily on guarantees and security.
Security and the PPSR
If the lender takes a GSA, the security interest must be registered on the PPSR for the lender to be protected. Registration matters because of the priority rules in s 55 of the Personal Property Securities Act 2009 (Cth):
- Perfected beats unperfected: A registered (perfected) security interest in collateral has priority over an unregistered one.
- First to register generally wins: Between two registered interests in the same collateral, priority generally runs from the earliest registration time.
The practical consequences flow directly from those rules. If you borrow from a second lender who registers first, your first lender's security can end up behind the second lender's. If a security interest is never registered at all, the position is worse: in an insolvency, an unperfected security interest can be void against a liquidator, with the collateral vesting in the company, leaving the lender effectively unsecured.
Two traps are common. The first is late registration, which can hand priority to another creditor. The second is getting the registration details wrong, in particular identifying the wrong entity as the grantor. A registration against the wrong company or individual can be ineffective even though it was lodged on time. Check the registration details with the same care you would give the loan agreement itself.
Borrowing from a related party
Many trusts are funded not by a bank but by the people behind them: a founder lending money in, a related company, or adult family members. This is common and legitimate, but it carries its own risks.
Put it in writing
A related-party loan should be documented like any other loan: amount, interest rate (if any), repayment schedule, events of default, and whether it is secured. Informal arrangements that are never documented create uncertainty about whether the money was a loan at all, and about what happens if the trust cannot repay it.
Aim for arm's length terms
Interest and repayment terms that look commercial are easier to defend if the arrangement is ever scrutinised, whether by the ATO, a liquidator or a lender reviewing the trust's accounts.
Watch Division 7A
This is where an accountant becomes essential. Division 7A of the Income Tax Assessment Act 1936 (Cth) can treat certain loans from a private company to its shareholders or their associates as dividends. Under s 109D, a loan that is not fully repaid before the company's lodgment day can be taxed as a dividend. If a company lends to the trust, or the trust owes an unpaid present entitlement to a company beneficiary, Division 7A issues can arise. This is not something to guess at; the structure needs to be mapped and managed before money moves.
Register security here too
If you take security for a related-party loan, register it on the PPSR like any other lender would. It protects your priority if the trust later borrows from a bank, and it makes the arrangement real rather than informal.
Director duties when the trustee is a company
If the trustee is a company, the directors carry the usual duties, plus a layer of trust-specific exposure.
Insolvent trading
Section 588G of the Corporations Act 2001 (Cth) makes a director liable for debts the company incurs while insolvent, or that make it insolvent, if there were reasonable grounds to suspect insolvency at the time. A loan the trust cannot service can become exactly such a debt. Directors need to monitor cash flow and serviceability continuously, not just at application time.
Liability as a corporate trustee
Section 197 of the Corporations Act 2001 (Cth) adds a trustee-specific rule. Where a company acts as trustee and cannot be fully indemnified out of trust assets because of a breach of trust, because it acted outside the scope of its trustee powers, or because the deed denies or limits the indemnity, the directors can be personally liable for the company's trust liabilities. Note the scope: a director is not caught merely because the trust has insufficient assets to pay. The exposure arises where the indemnity itself is lost.
Insolvency is more complicated for trusts
Carter Holt Harvey illustrates how contested things become when a corporate trustee becomes insolvent. Whether a secured lender can reach trust assets, how the trustee's right of indemnity ranks, and who is paid from the proceeds of trust assets are all live questions that can be fought over for years. The way to avoid that outcome is to keep the borrowing inside the deed, keep the registrations current, and act early if the trust is heading into difficulty.
Where trust borrowing commonly goes wrong
The recurring problems are predictable, and mostly avoidable:
- Borrowing before checking the deed: The lender approves the loan, then discovers the deed has no power to borrow or to grant security, and the whole transaction has to be unwound or re-documented.
- No trustee resolutions: The loan and security are signed without resolutions authorising them, leaving the trustee's decision open to challenge later.
- Guarantees signed without understanding the exposure: Directors sign personal guarantees without knowing what triggers them or whether they are capped.
- Late or defective PPSR registrations: The security exists on paper but has no priority, or is ineffective against a liquidator.
- Informal related-party loans: Money moves with no documents, no interest terms and no security, creating tax and dispute risk.
- Ignoring Division 7A: A loan or unpaid present entitlement to a company beneficiary produces an unexpected deemed dividend at tax time.
When to bring in a lawyer and an accountant
The professionals should be involved at specific points, not as an afterthought.
A lawyer is needed before you apply, to review the deed and confirm the powers to borrow, grant security and give guarantees, and to prepare a deed variation if any power is missing. At signing, a lawyer should review the lender's loan and security documents, explain what the guarantees actually expose you to, and draft the resolutions and any related-party loan agreements. If the trust gets into financial difficulty, early legal advice matters: directors should not keep trading while insolvent, and the options for restructuring or dealing with creditors are much wider while the trust is still solvent.
An accountant is needed for the tax side: how interest and repayments are treated, whether Division 7A applies to any inter-entity loans or unpaid present entitlements, and how distributions can be made once the debt is repaid.
Start with the trust deed, not the loan application
If there is one thing to take from all of this, it is that the trust deed decides whether the loan is valid, whether the trustee's indemnity holds up, and whether the directors are exposed. A lender will happily approve a loan that the deed does not authorise; the problem only surfaces when the trustee tries to repay itself from trust assets and finds it cannot, or when a liquidator starts asking questions. Getting the deed checked and, if needed, varied is a small cost compared with a loan that cannot be enforced or a director facing personal liability. That check is exactly the kind of thing a short consultation with a lawyer can resolve before you ever submit an application.