How a family trust borrows money in Australia, deed powers, trustee liability and PPSR security

Running your business through a family trust is a common structure in Australia, but it changes the borrowing picture in one fundamental way. The trust itself cannot sign a loan. It is not a separate legal entity, so it has no signature, no legal capacity to owe money, and no assets of its own. The trustee signs, and the trustee owes. Everything else about a trust borrowing, from what a lender will accept as security to whether your personal assets are exposed, flows from that single fact.

This article walks through the mechanism end to end: where the trustee's power to borrow comes from, how the loan contract and the trustee's indemnity work, how lenders secure their position through the Personal Property Securities Register (PPSR), what happens when the lender is a related party, and the duties that continue after the money is drawn. If you run your business through a discretionary trust and are considering external finance, or plan to fund the trust yourself, this is the territory you are stepping into.

Who is involved when a family trust borrows

Six actors, each with a distinct role:

The trust: Not a legal entity. The trustee holds the trust's assets and income on trust for the beneficiaries, and it is those assets that will back the loan.
The trustee: The party that contracts with the lender. It may be an individual or a company (a corporate trustee). It is personally liable on the loan, subject to a right to be indemnified out of trust assets.
The lender: Usually a bank or non-bank lender. It lends to the trustee, takes security over trust assets, and will often ask for personal guarantees.
The guarantors: Commonly the directors or controllers of the trustee company, and sometimes adult beneficiaries. They put their own assets on the line if the trust defaults.
The PPSR: The national register of security interests in personal property. Registration is what preserves a lender's, or a related lender's, priority over the trust's assets.
The advisers: An accountant for the tax side, and a lawyer for the deed, the loan documents and the security.

Where the power to borrow comes from: the trust deed

The trustee's power to borrow is not automatic. A trustee only has the powers that the trust deed confers, together with any powers given by general trust law. For borrowing, everything starts with the deed.

When you open the deed, you are looking for express powers to:

borrow money and enter into finance documents;
grant security over trust assets, such as a mortgage or a general security agreement;
give guarantees and indemnities, which matters where lenders want group or cross-guarantees.

Most modern discretionary trust deeds contain a general power to borrow and to give security, but older or more restrictive deeds may be silent, or may limit borrowing to particular purposes or amounts. If the power is missing or restricted, the trustee has no authority to take the loan, and a lender that reviews the deed, which they almost always do, will not proceed until it is fixed.

The fix is a deed variation, executed properly and consistently with any variation clause in the deed. This is a lawyer's job: getting it wrong can leave the amendment ineffective. Lenders will want to see the variation before settlement, so it is worth arranging before you apply rather than holding up a finance approval.

Who actually owes the money: the trustee's contract with the lender

Because the trust is not a legal entity, the loan contract is between the lender and the trustee. The trustee borrows as principal, in its own name, and is personally liable to repay.

Against that personal liability stands the trustee's right of indemnity. Under general trust law, a trustee who incurs a liability properly in the course of carrying on the trust's business is entitled to be reimbursed out of the trust assets, and holds a charge over those assets to enforce that right. The High Court confirmed the strength of that position in Octavo Investments Pty Ltd v Knight [1979] HCA 61: the charge extends over the whole range of trust assets, and the beneficiaries' entitlements rank behind the trustee's right of indemnity.

Two consequences follow, and both decide how much of your own money is at risk.

First, the indemnity is only available for liabilities properly incurred. If the trustee borrows outside the powers in the deed, or for a purpose that is not a proper trust purpose, the right of indemnity can be lost, and the trustee is left personally exposed with no right to recoup from trust assets.

Second, the lender's recourse depends on the contract. Lenders commonly include limited recourse wording that confines their claim to the trust assets and the trustee's indemnity, rather than the trustee's wider assets. But limited recourse is a negotiated term, not a legal default, so it must be in the loan document to count.

This is also where the choice between an individual and a corporate trustee matters. Lenders generally prefer a corporate trustee. It gives a cleaner separation between business risk and personal assets, makes the trust easier to administer, and gives the lender a familiar entity to deal with. With individual trustees, the trustee's personal assets sit behind the indemnity, and if the trust's assets are insufficient, the lender can pursue the individual directly. If you have individual trustees and want to borrow, converting to a corporate trustee before applying is often the sensible move.

Security and the PPSR: how lenders protect their position

Business lenders rarely lend to a trust unsecured. The standard package is a General Security Agreement (GSA) granting a security interest over the trust's personal property, plus specific security such as a mortgage over real property or an equipment finance agreement, and personal guarantees.

The GSA creates a security interest within the meaning of s 12 of the Personal Property Securities Act 2009 (Cth) (the PPSA): an interest in personal property provided for by a transaction that, in substance, secures payment or performance of an obligation. The mechanism that makes that interest enforceable against third parties is registration on the PPSR.

Registration is what determines who gets paid first. Under s 55 of the PPSA, a perfected, meaning registered, security interest beats an unperfected one, and between perfected interests, priority generally follows the order of registration. Register first and you stand ahead of later-registered lenders. Delay, and a lender who registers later can still overtake you.

There are fixed windows that matter in practice. For purchase money security interests, which is what equipment finance usually creates, s 63 of the PPSA requires registration within 15 business days of the debtor taking possession of the goods for the lender to keep the super-priority that a PMSI confers. Miss the window and the equipment lender drops into the general queue.

When the trustee borrows from an arm's length lender, the lender handles the PPSR registration. The point that is easy to miss is on the other side of the transaction: when you or a related entity lends to the trust, you become the secured party, and it is up to you to register. A related-party loan documented and registered properly preserves your priority against the trust's other creditors, including in an insolvency. A loan left unregistered is an unsecured claim against the trustee's indemnity.

Funding the trust from a related company, from the founders, or from adult family members is common and workable, but it is where tax law starts to bite.

The first rule is to document it like a real loan: a written loan agreement covering the amount, the interest rate, if any, the repayment schedule, the events of default, and whether it is secured. If the trust pays interest or repayments back to a related entity, the records need to support that.

The second rule is to be alert to Division 7A of the Income Tax Assessment Act 1936 (Cth) (the ITAA 1936), which applies to benefits flowing from private companies to their shareholders or associates, including through trusts. The mechanics can produce an unwelcome result:

If a private company makes a loan to the trust, or to a shareholder or associate, s 109D of the ITAA 1936 treats the loan as a dividend unless it is fully repaid before the lodgment day, or one of the exclusions applies.
If the loan rolls over from one year to the next, s 109E of the ITAA 1936 requires a minimum yearly repayment, and a shortfall is itself treated as a dividend.
An unpaid present entitlement (UPE), where the trust makes a company beneficiary presently entitled to income but does not pay it out, can be treated as a loan to the company under the same regime, as the ATO explains in its Division 7A guidance for trusts.

Whether a particular UPE is a loan for Division 7A purposes depends on the circumstances, as the ATO guidance makes clear. That is exactly why the accountant should be in the room before funds move between a trust and a related company, rather than after the tax return is lodged.

What the trustee must keep doing after the loan

Borrowing through a trust is not a set-and-forget event. The trustee carries ongoing obligations while the debt is outstanding.

If the trustee is a company, the directors owe the full suite of duties under the Corporations Act 2001 (Cth) (the Act), and one of them takes on extra weight once there is debt in the structure: the duty to prevent insolvent trading. Under s 588G of the Act, a director breaches the duty if the company incurs a debt while insolvent, or becomes insolvent by incurring it, and there were reasonable grounds for suspecting insolvency. A corporate trustee that borrows beyond serviceability puts its directors in that zone, and the fact that the company acts only as trustee does not remove the duty.

Practical compliance follows from that: trustee resolutions authorising the loan, the security and the execution of documents; accurate records of drawdowns, interest and repayments; and PPSR registrations kept current. Because an unperfected security interest loses priority to a perfected one under s 55 of the PPSA, a registration that lapses quietly erodes the lender's position.

Where it goes wrong: the common traps

A few failure modes recur:

Borrowing without deed power: If the deed does not authorise the borrowing, the trustee breaches the trust, and the indemnity that would otherwise protect it falls away. Personal exposure follows.
Individual trustees with thin trust assets: The indemnity is only as good as the trust's assets. If they do not cover the debt, the individual trustee's own assets are next in line.
Unregistered or late security: A GSA over trust assets that is not on the PPSR loses to a later-registered interest, and can be worthless in an insolvency.
Guarantees signed without reading the trigger events: A personal guarantee converts a business default into a personal debt, and guarantors are often surprised by how broadly events of default are drafted.
Division 7A surprises: A UPE to a company beneficiary, or a loan from a company that is not repaid by lodgment day, can be taxed as a dividend.
Short trading history: Lenders respond to a trust with little history by leaning harder on security and guarantees, which concentrates risk with the guarantors.

None of these is fatal if it is caught early, and all of them are cheaper to fix before finance is drawn than after a default.

When to bring in a lawyer and an accountant

Each adviser has a distinct job at a distinct point.

The lawyer is involved from the front end: reviewing the deed and any variations to confirm the borrowing, security and guarantee powers, and drafting a variation if a power is missing. When the loan is from a related party, the lawyer prepares the loan agreement and any security, and checks the PPSR registration. When the lender is external, the lawyer's role is to review the lender's documents, including the limited recourse wording and the guarantee, and to explain what each clause actually exposes.

The accountant handles the tax side: how interest flows between the trust and related entities, whether Division 7A applies to a loan or a UPE, and what the records need to show. The accountant should be consulted before the funds move, because the character of the transaction, loan versus distribution, is fixed by what is done, not by what is intended later.

A deed review and a straightforward loan agreement are usually fixed-fee work, and modest compared with the cost of losing the indemnity, losing priority on the PPSR, or facing a Division 7A dividend at the end of the year.

The indemnity is only as good as the power to borrow

Everything in this article traces back to two things. The first is the deed: the trustee's power to borrow and give security determines whether the transaction is a proper trust liability at all, and the indemnity that protects the trustee exists only for proper trust liabilities. The second is the PPSR: registration timing decides who gets paid first if the trust cannot repay, whether the lender is a bank or your own company.

So the sequence that protects you is: check the deed before you apply, document the loan and any security properly, and register the security interest on the PPSR without delay. Get those three right, and a family trust is a perfectly workable borrower. Get any of them wrong, and the personal assets you were trying to protect are exactly what is exposed. A lawyer can confirm the deed position and the security paperwork for a modest fixed fee, and that review is where the leverage sits, before the loan is signed rather than after a default.