TRADING TRUSTS – A TRAP FOR THE UNAWARE

A growing challenge for businesses is dealing with debtors who use a trading trust as their business structure. This setup is particularly popular among small family businesses as a way to protect assets and reduce tax obligations. While trusts can take various forms and business structures may differ, the core issues remain the same.

What is a Trading Trust?

A typical trading trust structure looks like this:

Doe Nominees Pty Ltd as trustee for The John and Jane Doe Family Trust, trading as J & J Doe Sales.

When you enter into a contract with a trading trust, you are actually contracting with the trustee, not the trust itself. Many businesses only record the trading name and may not realise they are dealing with a trust. A trustee can be a company, an individual, or a partnership.

The Risks of Trading Trusts

The real concern arises when it’s time to collect a debt. The following issues can occur.

• Difficulty identifying the contracting party:
  It can be difficult to determine exactly who you have contracted with, as trust details are not always easy to find.
• Inability to recover a debt:
  In some cases, the trustee, such as a $2 company, may not be entitled to reimbursement from the trust’s assets, even if the trust holds millions.This means you could be left unable to collect your debt from the trustee, even if the trust itself holds millions in assets.

How to Protect Your Business

When setting up new credit accounts, take these steps to safeguard your interests:

1. Verify Business Details:
   Conduct a full business name or company name check (See our ‘Useful Tools’ page).
2. Request Trust and Trustee Information:
   Your credit application should require full details of both the trust and trustee, including the ABN and ACN (if applicable).
3. Confirm Reimbursement Rights:
   Ensure your credit application includes a declaration that, if the applicant is a trust, it has the right to reimbursement for debts from trust assets.

By taking these precautions, you can avoid being caught in the trading trust trap and protect your business from potential financial losses. For more information, or to enquire about professional debt collection services in Victoria, contact our team at Vic Collect today. We are here to help.