Asset Protection Tax Structures

Why & How Do I Protect My Assets?

Asset protection is thought of something that’s only for the already wealthy – however it’s actually much more effective when as early as possible. After all, you wouldn’t be going into business unless you thought it was going to be profitable!

A start-up business owner is going take a much bigger financial hit from a lawsuit than someone who is already wealthy!

Asset protection strategies can help against a number of potentially disastrous life events;

  • divorce or family breakdown or death
  • bankruptcy or lack of cash to pay your debts in your business
  • legal action against your business

Basic Tactics For Protecting Assets

Tactic 1 – Remove Vulnerability To Any Risks

Removing exposure to risk – something that’s easily said but in reality is extremely difficult. It is both the most obvious and least helpful thing to say when talking about protecting assets.

If you’re a brickie then you shouldn’t be doing electrical work at a building site. If you’re an accountant then you shouldn’t be giving financial advice. A beauty therapist shouldn’t be providing Botox unless they are qualified. Always try to stay in your professional lane in business – one wrong move can bring lawsuits for negligence.

Tactic 2 – Insurance

Every business should have insurance for public liability as part of their regular business insurance package. The small cost of insurance compared to a $10,000,000 settlement cannot be understated.

Your insurance broker will often save you more than his fee and we recommend that any client uses a professional to sort insurance.

Tactic 3 – Don’t Own Anything

Selling or transferring your assets to your spouse or family after an event has happened will not protect them from being taken by the courts in legal action. The courts have power to follow the paper trail and seize the assets. From the commencement of bankruptcy, a court can potentially look back to any asset transfers for 4 years.

Ideally your trusted family member owns the relevant assets inside another legally separate entity or your assets are owned inside an SMSF, and this has been set up at the time that you first moved into business.

Transferring assets at a later date can have capital gains tax complications and will cause you to unnecessarily pay taxes.

What Structures Will Protect Your Assets?

There are a number of assets that business owners can use to both trade out of, and protect their assets. Where a client is looking for a testamentary trust (or a bloodline trust) we will always forward you to a specialist, however a number of structures can be explained easily;

StructureFeatures that Protect Your Assets
Sole TraderNone. This is the easiest structure to set up, and offers zero protection of your assets in the case of family/spouse breakdown, bankruptcy or legal action.

This is especially dangerous as the family home is at risk.
PartnershipWhere the partnership involves sole traders, the above applies.

Where the partnership involves a partnership of another entity, the features take on that entity.
CompanyAs a company is a separate legal entity, the business assets are legally separate to your personal assets.

In the event of legal action against the company a creditor will be able to attack the company assets, but will not be able to attack the assets of the shareholders.

Contrary to this, if the individual has legal action against them, the creditor can come after their assets which include owning the shares of their company – this is especially important to think about when many small business owners provide directors guarantee’s at the beginning to get funding or establish relationships with suppliers.

There are exceptions to the rule – specially Directors Penalty Notices where a director has breaching their obligations.
Discretionary Trust (often a “Family Trust”)A popular asset protection tool – this has been the stock standard advice for as long as I can remember.

A trust with a corporate trustee gives you the benefits of the trust as a trading entity, with the benefits of the company as an asset holder. Therefore as with companies, this will protect you from legal action against the business but will not protect the business from legal action against you!

A common situation is to have a spouse as sole shareholder of the corporate trustee, and have the business decision maker as director of the corporate trustee. This only allows the business decision maker to be sued for breaching of their directors duties (which you shouldn’t be doing!), but not for legal action to/from the business. The disadvantage of this is that you give up full control of the shares.
Unit TrustThis structure is similar to a discretionary trust, except the units are up for grabs in the event of legal action against the individuals.

These units are what receives a profit distribution and removal of these from your hands is something to be avoided.
Self Managed Super FundBuying assets in a superannuation fund can be a great idea provided that you’re not breaching any NALI provisions or sole purpose tests. We recommend you speak to a financial planner (which we can point you towards!) before doing this.

Mum & Dad Business Owners, Investors & Asset Protection

The aim of asset protection for a married couple is to shield the family home & any other investments from business risk. It’s often the case that one spouse has control of the business and is therefore an inferior candidate for asset ownership.

Below are our recommendations for a cookie-cutter entity set up. We note that everyone’s circumstances are difference and we urge you to contract us before setting up any entities.

Our Recommendation for Mum & Dad Business Owners

  1. The entity should be a discretionary trust with a corporate trustee – this allows profit distributions to the most tax effective person regardless of who owns shares.
  2. The non-business involved spouse should solely own the shares of the corporate trustee – this shields the risky spouse from being sued personally and losing control of their business.
  3. The other spouse should be a director of the corporate trustee which puts them in control of the business regardless of ownership.

Our Recommendation for Mum & Dad Business Owners With High Value Assets

  1. Structure your business as per the above.
  2. Purchase your high value business assets (motor vehicles, intellectual property, equipment) in a separate entity with the shareholder again being the non-business spouse.
  3. The director is the non-business spouse this time.

Our Recommendations for Mum & Dad Business Owners With Investments

  1. Follow the above steps.
  2. Use an SMSF to invest, or another separate entity as per the high value assets recommendation to purchase your private investments in.
  3. Ensure that the non-business spouse has all of the assets & investments in their name, to shield from any business risk including director obligations.

Final Thoughts

Asset protection is needed as early as possible to protect yourself from a disastrous first few years of trading -it’s not only for the wealthy! It can mean the difference in protecting your family home and not.

If you are looking for an accountant or thinking it’s time you made a change of structure, please give us a call on (03) 8568 3606. With over ten years of combined experience working with a diverse range of clients, Bookkept is well equipped to assist your business & personal income taxes.

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