Asset protection structures in Australia: companies, trusts, and the limits of separation
Asset protection in Australia uses layered ownership structures: companies separating business risk from personal assets, trusts holding wealth at one degree of separation from the controlling individual, and individual ownership of certain bankrupt-proof asset classes. Each layer has limits, and the structure is only as protective as its operation.
The Pty Ltd company is the most common starting point. It separates business creditors from personal assets; if the company fails, creditors of the business cannot pursue the directors personal assets except in defined circumstances. However, directors remain personally liable for unpaid PAYG, super guarantee, GST in some cases, breaches of duty under the Corporations Act, and trading while insolvent. Personal guarantees signed in favour of suppliers or banks override the corporate veil.
Discretionary (family) trusts hold wealth at one degree of separation from the controlling individual. The beneficiaries of a discretionary trust have no enforceable right to capital or income; the trustee has discretion to distribute among the class of beneficiaries. Properly established and operated, this means trust assets are not directly available to the personal creditors of any beneficiary and, with careful drafting and operation, generally including the controller, although family law courts and bankruptcy trustees can reach trust assets in some cases (for example Kennon v Spry [2008] HCA 56), and unpaid entitlements owed to the controller are available to their creditors.
Bankrupt-proof asset classes under section 116 of the Bankruptcy Act 1966 are worth understanding before structuring. Superannuation balances, life insurance proceeds, and certain compensation payments are protected from a trustee in bankruptcy, although super contributions made to defeat creditors can still be clawed back (sections 128B and 128C). The family home is not protected; the bankrupt’s interest in it vests in the trustee, although a co-owner’s own share does not. Knowing the protected categories changes how wealth can be allocated across owner, spouse, and trust.
A common structure combines these elements. A discretionary trust owns the operating Pty Ltd. The individual is the sole director of the operating company and a potential beneficiary of the trust. Trade risk sits in the operating company. Equity sits in the trust. A corporate trustee for the trust adds a further layer (the trustee company holds the trust assets in its capacity as trustee, separating trust assets from the trustee personal assets even further).
Where structures fail. Sham trusts where the trustee actually treats trust assets as their own (the structure is disregarded by a court). Personal guarantees signed for company debts (the corporate veil does not protect against contractual obligations the individual entered into directly). Director duties breaches that survive corporate separation (insolvent trading is a common claim). Bankruptcy clawback: transfers for no or inadequate value in the five years before bankruptcy can be unwound (section 120), unless the recipient proves the person was solvent and the transfer was more than four years earlier (related entities) or two years earlier (others), and transfers made to defeat creditors can be unwound with no time limit (section 121).
Practical advice. Work with both a tax adviser and an estate planning specialist when designing the structure; one without the other is incomplete. Document everything: trust resolutions, distribution decisions, trustee meetings, corporate formalities. Make and document distribution decisions each year, considering which beneficiaries carry creditor risk. Maintain corporate formalities for the operating company. Review the structure periodically as the controllers circumstances and assets change.
Frequently asked questions
Does a Pty Ltd protect my personal assets?
Only partly. It separates business creditors from personal assets, but directors remain personally liable for unpaid PAYG and superannuation under the director penalty regime, for GST in some cases, for breaches of duty, and for insolvent trading. Any personal guarantee signed to a bank or supplier overrides the corporate veil entirely.
Can a family trust protect assets from creditors?
Properly established and operated, trust assets are not directly available to the personal creditors of a beneficiary, because beneficiaries of a discretionary trust have no enforceable entitlement. With careful drafting and operation this generally extends to the controller, although family law courts and bankruptcy trustees can reach trust assets in some cases. The protection also fails where the trustee treats trust assets as their own, which lets a court disregard the structure.
What does a typical protective structure look like?
A discretionary trust owning the operating Pty Ltd, with the individual as sole director of the operating company and a potential beneficiary of the trust. Trade risk sits in the operating company, equity sits in the trust, and a corporate trustee adds a further layer of separation.
Can asset transfers be unwound in bankruptcy?
Yes. Transfers for no or inadequate value in the five years before bankruptcy can be unwound under section 120, unless the recipient proves the person was solvent and the transfer was more than four years earlier (related entities) or two years earlier (others). Transfers made to defeat creditors can be unwound with no time limit under section 121. Structuring done in response to a looming claim is far more vulnerable than structuring put in place years earlier and operated properly throughout.
This article is general information only and does not constitute legal, financial, or tax advice. While we endeavour to keep content accurate and current, laws and regulations change frequently. For advice specific to your circumstances, please consult a qualified professional adviser. CoSec Partners Pty Ltd accepts no liability for actions taken based on this content.