are you financially well organised? Protecting your assets Are they at risk?

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1 are you financially well organised? Protecting your assets Are they at risk?

2 Are my assets at risk? A key foundation step in working to achieve your goals and objectives and to become financially well organised is to develop an Asset Protection Plan, which covers the ownership structure of assets, ensuring they are owned in the right names or entities to limit the exposure to creditors. You work hard to generate income and make savings to invest in assets that are part of your long-term goals, so it makes sense to protect those assets as best you can. Assets can be owned in different structures such as: Personally in your own name Partnership jointly owned by partners Company Trust Superannuation Fund Personally Michael Ward Partner FWO Chartered Accountants Owning business assets in your own name may not be an appropriate strategy long-term to maximise protection of your assets. It is very common for most people to acquire their personal residence in their own name and as they pay-off their mortgage over the years, their equity in their home rises. It makes sense to own your own home in your own name to attract the principle place of residence capital gains tax exemption incase you ever sell your home at a later date for a large capital gain. It is important to understand that if you also conduct a business in your own name that all your assets in your name, including your own home, are potentially exposed to creditors. You should contemplate an alternative structure to own your business so as to separate your business assets from your personal assets, like your home. Partnership A partnership of individuals is a simple structure established when people either purchase an asset or start up a business together. Each partner has a fractional interest in the assets of the partnership and is jointly and severally liable for the liabilities of the partnership. This means that if the partnership has more liabilities than assets (a shortfall) each partner may have to contribute according to their fractional interest in the partnership. However, a risk in partnership is

3 if you are contemplating being in a partnership, or you are in a partnership, be aware that you could be held liable for the entire debts of the partnership. that if one partner has no assets, the other partner(s) will be obliged to meet the shortfall in total. Partnerships can comprise of companies and trusts, together with individuals. There can be any combination of these. However, the rule of joint and several liability still applies, so if you are contemplating being in a partnership, or you are in a partnership, be aware that you could be held liable for the entire debts of the partnership. Company A company is a separate legal entity governed by its own Constitution and the Corporations Act As a separate legal entity, a company can own assets, own and operate a business, incur debt, sell assets, act as a trustee, enter into a partnership, etc. A company is owned by shareholders and managed on a day-to-day basis by directors. A company provides protection to its shareholders as the company s liabilities are limited to the company, and the exposure for shareholders is limited to the amount of capital paid on their shares. In some instances, the directors of the company can be held personally liable for the debts of the company. Some examples of this are where directors incur debts when the company is insolvent, or where they have engaged in fraudulent activities. Generally, assets external to the company are protected from creditors. However, if directors have given personal guarantees for the debts incurred by the company this will not be the case. Trust Trusts are entities which separate the legal control and ownership of assets from those that enjoy the benefits of the income and capital of those assets. There are different forms of trusts fixed trusts, unit trusts, non-fixed trusts, etc. The most common form of trust is the discretionary trust or family trust which is a non-fixed trust. Most business owners have one or more of these trusts in their structure. A trust is governed by the rules in its trust deed which setsout the powers of the trustee who is the legal owner of the trust assets for the benefit of named potential beneficiaries in the trust deed. One of the benefits of a discretionary trust is the ability of the trustee to distribute income and capital to different beneficiaries from year to year. The trustee decides who receives what amount in the given year and is the person that controls the trust, whereas the beneficiaries are the nominated people who are to enjoy the benefits of the income and capital of the trust.

4 The trustee in a discretionary trust has the absolute discretion to determine who receives income and capital, if any, each time they make a distribution. Significant tax savings can be achieved each year by spreading taxable income over a range of eligible beneficiaries without relinquishing control over the business operations. Trust beneficiaries are not liable for the debts of a trust. However, if a trust is in trouble and there are unpaid entitlements of income and or capital owing by the trust to a beneficiary, these amounts are not secured to the beneficiary and may be lost if there are insufficient assets in the trust from which to meet creditors claims. Superannuation Fund Many people accrue savings through superannuation to fund their future retirement. Assets owned in your superannuation fund are protected from creditors, unless you have significantly changed your pattern of contributions to the fund and shifted larger amounts of assets into the fund to protect them from creditors. A Self Managed Superannuation Fund ( SMSF ) can provide further protection for assets such as your business premises, however you need to beware that there are superannuation laws that must be adhered to protect concessional tax treatment. Loans owing by your entities A common mistake made by people in their asset protection strategy is thinking that their assets are completely protected by using companies and trusts in their structure without considering loans owing between their entities, or to them personally.

5 There are two types of loans: Assets: those loans that are owing to the entity by another entity or individual; and Liability: those loans that are owing by the entity to another entity or individual. Consider this scenario Company A has an asset, being a loan owing to it by Company B, and a liability, being a loan owing to its shareholder, Jack. Jack owns both Company A and Company B. Company A is forced into liquidation due to economic circumstances and does not have sufficient assets to cover its liabilities. In fact creditors are only able to be paid 50% of the amount they are owed. Company B is forced to pay back its loan to Company A in full. However the loan owing by Company A to Jack is unsecured and therefore ranks equally with all other unsecured creditors, so Jack only gets 50% of his money back. If Jack had provided the loan to Company A and had taken a charge over the assets of the Company, then Jack s loan would have been secured and he would have ranked higher than the unsecured creditors, and would have received significantly more than 50% of his money back, if not all. Separating assets Another area of risk is where passive assets are mixed with business assets in entities. Often the business premises are owned in the same entity as the business. If the business was to fail, then the property is also at risk of being lost. Using different entities enables the risk exposure of assets to be limited. By separating business assets from passive assets, you can protect the passive assets, provided that the entities are appropriate and the transactions between them are correctly structured. Get advice Transferring assets between entities can result in additional taxes such as stamp duty and capital gains tax. You must seek professional advice and understand the tax and other implications when you restructure your assets, whether they are owned in companies, trusts, partnership or superannuation. Any re-structuring would need to be justified by significant benefits outweighing costs. The best solution is to determine the appropriate entity to own an asset at the time of original acquisition with consideration given to maximising asset protection.

6 Your Asset Protection Plan Checklist Limit the members in your family who have exposure to debts of your entity or business. Do both Mum and Dad need to be Directors of the trading company? If the circumstances allow it and it is cost effective to do so, consider structuring the ownership of your personal and business assets into other entities such as trusts and companies. If you do this at the very start, you have the best structure from day one. Understand that partners in a partnership are jointly and severally liable for the liabilities of the partnership. Consider taking security over loans that you make to your entities or to other people. Keep your passive assets in a separate entity to your business assets. Sometimes it may also be prudent to separate different businesses or own business assets in a separate entity to the operating entity. Consider superannuation as an effective asset protection alternative. An effective Asset Protection Plan will make sure the ownership structure of your assets help limit your exposure to creditors. Contact FWO Chartered Accountants to develop an effective Asset Protection Plan for you, we ll help you on your journey to becoming Financially Well Organised. For more information on becoming Financially Well Organised contact: Michael Ward Partner FWO Chartered Accountants michael@fwo.net.au (07)

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