Asset Protection

INTRODUCTION

Every business needs an asset protection strategy.

As bankruptcy trustees and official liquidators, we have seen business owners enjoy enormous benefits when they successfully implement even the most basic asset protection strategies.

The good news is that simple, affordable asset protection strategies do exist.

Our guidebook is the perfect introduction to this complex area of law. It’s written in plain English and based on our combined 40 years of experience in investigating and analysing business failure. With plenty of real-life examples of how bankrupts and directors have failed to take simple steps to protect their assets, it contains simple tips and tricks to help you figure out what to do and what not to do to safeguard your assets.

In short, this guidebook is a must-read for every new business owner.

50% OF NEW BUSINESSES FAIL

What happens if you don’t have an asset protection strategy?

We have worked with thousands of business owners who failed to heed this golden rule: it is negligent for business owners not to research and build an asset protection strategy.

As a result, they lost everything. Not just their businesses, but their homes and personal assets, their marriages, their families and their health.

None of these people expected to be our clients, but the fact is that the success rate for new businesses is extremely low. According to ABS, ASIC and AFSA statistics:

  • 25% of new businesses will cease trading within 12 months
  • 54% of new businesses will fail within three years
  • 10,000 companies are forced into liquidation or external administration each year
  • 30,000 people go bankrupt (or enter into a debt agreement) each year

We have seen, through the bitter experience of our clients, that money spent on asset protection strategies is more reliable than insurance and more valuable than physical security protection.

We care about our clients, and want to assist small business owners. We have seen 100’s of people lose their homes, in circumstances where a simple asset protection strategy could have saved it.  Trading a business via a company is a concept that was developed in the 1800’s. It is a wonderful asset protection device. Registering a security interest, just like a bank registers a mortgage, is another very old, but very effective asset protection tool that allows a business owner to be repaid before the ATO and unsecured trade creditors if the company fails.

Often the greatest losses from financial failure are the long-term emotional and personal consequences. These types of trauma can be avoided by prudent planning and a good asset protection strategy.

Effective asset protection requires a unique blend of accounting and law. A complete asset protection strategy requires experts in tax, family, succession and insolvency law to design and implement. That’s four experts, not one. There might be 70,000 lawyers and 50,000 accountants in Australia, but there are only 200 bankruptcy trustees.

We understand asset protection better than other professionals because it’s our statutory duty to set aside asset protection strategies.

We also understand that most small businesses won’t have the desire or resources to spend $5000–$10,000 to design a complete asset protection strategy. Instead, they need simpler, more cost effective options that might not be perfect, but are still highly beneficial.

KEY FACTORS OF ASSET PROTECTION

Asset protection strategies should be determined with regard to:

  1. Taxation obligations
  2. Matrimonial risk and family law
  3. Debt and equity capital requirements
  4. Business failure risk and insolvency law
  5. Set-up and annual compliance costs
  6. Plans to distribute profits.

The problem with these variables is that they result in contradictory requirements. For example, minimising tax generally increases the risk of your assets being exposed to claims by creditors and family members. And as you increase your asset protection, you materially increase your set-up and annual compliance costs.

With so many variables to consider, the right asset protection strategy needs to be tailored to individual risk profiles.

The best time to implement an asset protection strategy is before or shortly after a business has started trading when it is far cheaper to set up.
Australia has about 2.6 million businesses, according to the ABS. The owners of these businesses have chosen to trade via the following structures:

  • Companies      36%
  • Sole Traders   26%
  • Trusts              24%
  • Partnerships    14%

Note:  The above statistics exclude the 460,000 micro businesses that trade as sole traders but are not registered for GST.

Summary of key features of different entity types
Entity type Key Features
Sole Trader
  • Simplest business structure, indistinct from owner
  • Business income or losses included with other income in individual’s tax return and taxed at personal tax rates
  • Individual is personally liable for business debts
Partnership
  • Similar to sole trader, but with two or more people (or other entities) as co‑owners
  • Share of business income or losses from partnership included in each partner’s individual tax return and taxed at their personal tax rates
  • Partners are jointly and severally liable for business debts
Company
  • Distinct legal entity
  • Company profits are taxed at the flat corporate tax rate
  • Profits can be passed through to shareholders as dividends (where they are taxed at marginal personal tax rate, less franking credits)
  • Losses cannot be distributed to shareholders, but are retained and offset against future profits
  • Shareholders’ liabilities are limited, although there are duties imposed on directors
Trust
  • Obligation imposed on a trustee to hold assets for the benefit of others (the beneficiaries) — established by a trust deed
  • Earnings are passed through to beneficiaries, added to their individual tax returns and taxed at their personal income tax rates
  • Losses are not passed through to beneficiaries
  • Earnings retained in the trust are taxed at the top marginal tax rate
  • In a discretionary trust, the trustee can choose how earnings are distributed between beneficiaries

 

The following table indicates the trend in asset structures utilised during the past five years
Description: Australian private sector businesses, by entity type, number operating at 30 June 2010-2014

Source
: ASIC administrative data

There are two questions we like to ask most business owners:

  • What happens if somebody is seriously hurt at your business? Australia ranks just behind the US in terms of litigation per capita. Will your business survive material litigation or even a material change to its inherent business risks?
  • If your business fails, do you have personal assets at risk?

If you’re not sure how to answer both questions, it might be a good idea to read our guidebook on asset protection.

The reasons for business failure, based on ASIC findings, can be broadly summarised as follows:

Why companies fail
Reasons identified by practitioners, 1 July 2006 to 21 April 2015
Description: Most companies fail for management or financial reasons - fraud is uncommon

Source
: ASIC administrative data

 

Regulatory steps for setting up a business
Description: Illustrates the regulatory steps for setting up a business

Source
: Productivity Commission.

THE ASSET PROTECTION KIT CONTENTS

  1. Asset Protection Guidebook
  2. “Prenup” checklist
  3. Power of Attorney
  4. Last Will and Testament
  5. Purchase of Business checklist
  6. Business Sale Agreement
  7. Loan Agreement checklist
  8. Security Interest (Mortgage) checklist
  9. Guarantee and Indemnity
  10. Contract for Services
  11. Contract for Goods
  12. Contract for Sub Contractor
  13. Employee – Letter of Engagement
  14. Employee Contract – Full-time and Part-time
  15. Employee Contract – Casual
  16. Employee Pay Slip
  17. Employee Weekly Time and Wages Record
  18. Employee Leave Record
  19. Employee Record of Personal Details
  20. Employee Unsuccessful Probation
  21. Employee First Warning Letter
  22. Employee Termination of Employment
  23. Employee Termination of Employment for Misconduct
  24. Employee Redundancy
  25. PPS Registration tutorial – creating a registration
  26. PPS Registration tutorial – creating a secured party group
  27. Tax – TFN Application
  28. Tax – ABN Registration
  29. Registration GST
  30. Checklist for Partnership Agreement
  31. Discretionary Trust Checklist

DO YOU NEED HELP?

We invite you to give us a call. All initial discussions are free of cost or obligation. Talk to our in-house liquidators, bankruptcy trustees, lawyers or accountants about your circumstances and options.

We have offices in Sydney, Melbourne and Byron Bay together with affiliated offices in each capital city. Our nationwide network lets us service our clients’ needs throughout Australia.