Trust Loans: How They Work, Risks And Practical Steps

If you run your business through a trust (or you’re thinking about it), at some point you may need to move money around to keep things running smoothly.

Maybe your trading company is short on cash and the family trust has funds available. Maybe your trust needs working capital and a related entity can provide it. Or maybe you’re looking at buying an asset and you’re deciding whether the purchase should be funded internally or through a lender.

In practice, these arrangements are often called trust loans - and they can be a legitimate, practical funding tool for Australian businesses.

But these arrangements can also create risks if they’re undocumented, inconsistent with your trust deed, or not handled properly for tax and asset protection purposes. A “quick transfer” can quickly become an argument with the ATO, a dispute between business owners, or a real problem if the business later becomes insolvent.

Below, we’ll break down how trust loans usually work in Australia, the common legal and tax risks, and the practical steps you can take to set them up properly.

What Are Trust Loans (And How Do They Work)?

A trust loan is generally a loan where one party is a trust (acting through its trustee), and the other party is usually:

• your business (e.g. a company operating the business),
• a related entity (another trust or company in your group), or
• an individual (such as a beneficiary, director, or business owner).

Because a trust isn’t a person in the usual sense, the trustee is the legal party that actually enters into the loan. So you’ll usually see it documented as something like:

• as trustee for the Trust (lender or borrower), and
• (borrower or lender).

Common Trust Loan Structures In Small Business

In Australian small business structures, trust loans often appear in a few common ways:

• Family trust lends to the trading company: the trust has retained cash (for example, from profits, asset sales, or earlier contributions) and lends it to the operating company for working capital.
• Trading company lends to the trust: sometimes the company advances funds to a trust (for example, to buy an investment asset). This can raise specific tax issues depending on shareholders and beneficiaries.
• Trust-to-trust lending: one trust lends to another trust in a group (often where one entity is “cash rich” and another is “cash poor”).
• Loans involving business owners: funds move between a trust and a director/shareholder/beneficiary. These arrangements can overlap with what people informally call a director loan, even where the trust is involved.

Is A Trust Loan The Same As A Distribution?

No - and mixing these up is one of the easiest ways to create headaches later.

A distribution is usually about allocating trust income or capital to beneficiaries, following the trust deed and (often) trustee resolutions. A loan is a debt arrangement with repayment obligations.

If money is advanced and never repaid, you can end up with confusion over whether it was meant to be:

• a distribution,
• a gift,
• remuneration, or
• a loan that should be repaid (with interest).

Clear documentation and consistent accounting treatment is what usually prevents these disputes.

When Do Businesses Use Trust Loans?

Trust loans are often used because they can be:

• fast (especially compared to external finance),
• flexible (you can set repayment terms that suit your cash flow), and
• cost-effective (sometimes lower interest than commercial lenders, depending on the arrangement).

That said, speed and informality is also where the risk sits.

Typical Scenarios Where A Trust Loan Makes Sense

• Working capital and cash flow gaps: bridging payroll, supplier invoices, GST/BAS timing, or seasonal downturns.
• Funding growth: buying stock in advance, hiring staff, expanding into a new location, or upgrading equipment.
• Asset purchases: funding a vehicle, machinery, or investment assets held in a trust.
• Group restructuring: moving cash between entities after a restructure (but note: restructures can have tax and duty implications that should be checked carefully).
• Short-term lending pending external finance: for example, a trust loan while you finalise a bank facility.

Trust Loans And Your Trust’s “DNA”

Before you assume the trust can lend or borrow, it’s worth remembering that a trust is defined by its deed and its purpose.

Key roles in a trust structure (like the settlor, trustee, appointor and beneficiaries) can affect how decisions should be made and documented - and why the arrangement exists in the first place. If you’re unsure how these roles fit together, the settlor concept is a good example of how trust structures have rules that don’t always feel intuitive from a “normal business” perspective.

Key Legal And Tax Risks With Trust Loans

Trust loans can be commercially sensible, but they need to be handled with care. The biggest risks usually fall into four buckets: trust law issues, tax treatment, asset protection and insolvency, and record-keeping.

1. Trustee Power And Trust Deed Restrictions

In general, the trustee needs to have the power under the trust deed (and comply with trustee duties) to:

• lend money (if the trust is the lender),
• borrow money (if the trust is the borrower), and
• give security (if the loan is secured).

If the trustee acts outside its powers, the transaction may be vulnerable to challenge (for example, by beneficiaries) and it can create complications later if a dispute arises.

Because the legal position depends heavily on the wording of the deed and the surrounding facts, it’s worth getting advice before moving funds.

2. “It’s All In The Family” Doesn’t Remove Conflict Risk

Related-party funding can feel straightforward - until it isn’t.

For example:

• If some beneficiaries are active in the business and others aren’t, a trust loan that benefits the trading entity can become a point of tension.
• If you have multiple directors or controllers, undocumented loans can turn into disputes about who owes what (and whether repayments were fair).

Good paperwork helps keep expectations aligned while things are going well - which is when it’s easiest to agree on the terms.

3. Tax Risks (Including Unintended “Deemed” Outcomes)

Tax outcomes will depend on your exact structure, who owns what, and how the loan is treated in your accounts.

A few common issues that can arise with trust loans include:

• Division 7A issues (particularly where a private company is involved and funds are being advanced to shareholders/associates or through interposed entities). This is a common “surprise” area for business owners.
• Unpaid present entitlements (UPEs) between trusts and companies, and how those are managed over time.
• Interest deductibility: whether interest is deductible often depends on how the borrowed funds are actually used (for example, business or investment use versus private use).
• Distributions and loan accounts: if the loan is used as a “clean-up” mechanism at year end, you’ll want to make sure it lines up with trust resolutions and accounting treatment.

Where a company is lending (or money ends up owed to a company), concepts like distributable surplus can become relevant in understanding how the ATO may assess the position.

Important: This is general information only and isn’t tax advice. Because these tax issues are highly structure-specific, it’s a good idea to involve your accountant or tax adviser early and make sure your legal documents match the intended tax treatment.

4. Insolvency And “Uncommercial” Transactions

If your trading business later becomes insolvent, related-party transactions (including trust loans) can be reviewed closely by an external administrator or liquidator.

Depending on what happened, when it happened, and the specific insolvency provisions that apply, issues may arise around whether transactions were:

• properly documented,
• commercially reasonable (for example, a very low or very high interest rate),
• preferential (for example, repayments made to related parties ahead of other creditors), or
• otherwise challengeable under insolvency laws.

While you can’t “paper over” a problem, having clear terms, proper approvals, and records can help demonstrate what was agreed and why.

5. Asset Protection: Who Really Bears The Risk?

Many business owners use trusts as part of an asset protection strategy. But a trust loan can inadvertently shift risk around your structure.

For example, if the trust lends money to the operating company and takes no security, the trust may effectively be acting like an unsecured creditor. If the company fails, the trust might recover little to nothing.

On the other hand, if the trust borrows money and gives security over trust assets, you’ll want to be comfortable that this aligns with the trust’s purpose and beneficiary expectations.

Practical Steps To Set Up A Trust Loan Properly

If you’re considering trust loans in your business structure, there are a few practical steps that will usually make the arrangement clearer, safer, and easier to manage long-term.

1. Confirm Who The Parties Are (And Who Has Authority)

Start with the basics:

• Who is the trustee (company trustee or individual trustee)?
• Which trust is involved (full trust name)?
• Who is the borrower/lender on the other side (company, trust, individual)?
• Who can sign for each party?

If a corporate trustee is signing, check the company’s signing rules and whether the right directors are in place.

2. Check The Trust Deed (And Any Required Consents)

Before the loan is advanced, check that the trustee has power to lend/borrow and to provide security if needed.

Also check whether the deed requires any extra steps, such as:

• consent from an appointor,
• approval from a guardian, or
• minimum requirements around investing trust funds.

3. Decide The Commercial Terms Up Front

Even for related-party loans, it’s worth treating the arrangement like a real business transaction and agreeing on:

• principal amount (how much is being loaned),
• term (how long the loan runs for),
• interest (if any, and how it’s calculated),
• repayment schedule (weekly/monthly/at call),
• default (what happens if repayments aren’t made), and
• early repayment (can it be repaid early, and are there any fees?).

The key is consistency: whatever you agree, make sure your bookkeeping and actual payments follow the deal.

4. Put It In Writing (This Is Where Most Issues Are Avoided)

If you want the arrangement to be treated as a loan, document it like a loan.

That usually means a written Loan Agreement with clear terms, signed by the right parties.

A written agreement also makes it easier to:

• prove the loan exists if there’s later a dispute,
• support your accounting treatment, and
• show the arrangement is commercially managed (which can matter in insolvency or ATO contexts).

5. Consider Whether The Loan Should Be Secured

Some trust loans are unsecured (particularly short-term working capital advances). Others may be worth securing - especially where a trust is effectively lending “beneficiary wealth” into a higher-risk trading business.

Common types of security can include:

• a general security interest over company assets (often documented under a General Security Agreement),
• specific security over an item (like equipment), or
• real property security (where appropriate, and where the trust can give it under the deed).

If a security interest is taken over personal property, you’ll usually also consider registration on the PPSR. This is where the PPSR becomes part of the practical risk-management checklist.

6. Record Trustee And Company Decisions Properly

For related-party trust loans, it’s common (and often sensible) to create a paper trail showing that each party approved the transaction appropriately.

Depending on the parties, this might include:

• trustee resolutions approving the loan,
• director resolutions for a corporate trustee or borrowing company, and
• clear accounting entries and loan account ledgers.

This makes it much easier to answer the “what was this payment for?” question later.

7. Review The Arrangement Regularly

Trust loans aren’t always “set and forget”. As your business grows, you may need to adjust:

• repayment terms to match cash flow,
• security to reflect changing risk, or
• structure if you bring in new owners or investors.

A quick annual check (often timed around EOFY) can prevent loan accounts from drifting into messy territory.

What Legal Documents Might You Need For A Trust Loan Arrangement?

Not every trust loan needs a full suite of documents, but most businesses are far better off with clear, tailored paperwork.

Depending on the transaction, you may want to consider:

• Loan Agreement: sets out the core commercial terms (amount, interest, repayments, default). This is often the starting point for most trust loans.
• Security documentation: if the lender is taking security, this may include a General Security Agreement and steps for PPSR registration.
• Trustee resolutions: evidence that the trustee properly approved entering into the loan.
• Director resolutions: if a company is borrowing or lending, these help show the company approved the transaction properly.
• Related-party policy or governance notes: particularly helpful where multiple family members are involved and you want consistency around how related-party transactions are handled.

If your structure uses multiple entities, it’s also worth reviewing how money moves across the group more broadly (not just one loan). Seemingly simple transfers can have flow-on effects for tax, governance, and asset protection.

Key Takeaways

• Trust loans are a common way Australian businesses fund working capital, growth, or asset purchases - but they should be treated as real commercial arrangements, even where they’re “within the group”.
• The trustee should have the right powers under the trust deed to lend, borrow, and provide security (if relevant), and decisions should be properly documented.
• Undocumented or poorly managed trust loans can create disputes, confusion about whether payments were loans or distributions, and complications if insolvency occurs.
• Tax outcomes can be complex (especially where private companies and related parties are involved), so it’s important your legal documents and accounting treatment match your intended position - and you should speak with an accountant or tax adviser for advice on your circumstances.
• A written Loan Agreement, clear repayment terms, and (where appropriate) security and PPSR registration can significantly reduce risk.

If you’d like help documenting trust loans for your business or reviewing how money moves within your structure, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.