Asset Protection - Avoiding the common problems

by Michael Garrone Published

Previously we talked a little about Asset Protection and protecting yourself from the ‘what if’s’  [View the previous post here]. Asset Protection is one of those areas that is often ignored until a problem occurs. In building & construction and property development businesses we sometimes hear things like “it won’t happen to me” or “my affairs are in order”. But how can any of us really know this?

Business is after all a rough and tumble game to play. There are many different things that can happen to your business or to you personally over a long period of time.

What are the most common things that we see that can cause problems for you as a business owner and your family?

1. I THOUGHT IT WOULD NEVER HAPPEN TO ME, BUT NOW THAT IT HAS I WANT TO PROTECT MY ASSETS.
Unfortunately you are far more limited in what you can do once a problem has occurred. Any actions that you take are less likely to be effective and likely to cost far more than preparing in advance. In some cases there is little that you can do by the time you get to this point.

A good example would be trying to transfer the family home out of harm’s way once an event has occurred.

2. NOT SPENDING THE TIME TO GET YOUR STRUCTURE RIGHT IN THE FIRST PLACE.
The first step in any good asset protection strategy comes with getting your structure right. You need to consider all the potential threats and structure your affairs accordingly. The second part of this process is to set the ground rules for how those structures are to be used. It’s great to use a company but not going to be all that effective if you are the sole shareholder and director and own part of the family home.

Having the right structure in place will save you money in the long run.

3. THE RIGHT STRUCTURES ARE IN PLACE BUT THEY EITHER AREN’T FOLLOWED CORRECTLY OR MISUNDERSTOOD?
Your whole strategy can break down when you don’t follow the ground rules you establish at the start. I can think of many instances of service entities and plant hire entities where these entities owe the trading company large sums. Yes, the plant might be owned separately to the trading business but it could still be at risk. Just as often we find husband and wife both owe the business a large sum of money which potentially exposes the family home that was structured correctly from the start.

Do you know if your structure is effective in doing what it’s meant to be doing?

4. HAVE YOU REVIEWED YOUR STRUCTURE LATELY OR TAKEN ACCOUNT OF CHANGES TO THE LAW?
Things change and business moves quicker than ever. Do you know if what you have in place is still effective or are there some simple straight forward changes you can make now? These can be simple changes like clearing a personal loan balance through to realising you have assets that need to be registered under the PPSR [Personal Property Securities Register].

Does your plant hire entity have in place an effective PPSR security interest?

5. A LIFETIMES WORTH OF RETAINED PROFITS ARE LEFT IN THE TRADING BUSINESS
If we all know that problem events can and do occur then is it prudent to leave a lifetimes worth of profits at risk? There are some simple and cost effective steps that you can take to protect these profits.

Putting in place a strategy to protect a lifetimes worth of profits can nearly always be done without paying any income tax, capital gains tax or stamp duty.

6. INVESTMENT ASSETS ARE HELD IN THE TRADING BUSINESS.
This can include the business premises, rental properties, shares and other types of investments. One of the first principles of asset protection is ensuring business assets and investments are owned separately. It’s more than the family home that needs to be looked after.

Sometimes assets can be moved with minimal capital gains tax consequences but stamp duty will often be a problem – it’s far cheaper to get it right the first time.

7. HUSBAND AND WIFE ARE BOTH DIRECTORS OF THE COMPANY.
Yes, believe it or not this still happens. It’s been a long time since a company required a minimum of two directors and yet it still happens on occasion. Threats such as director penalty notices expose the assets of all directors.

Replacing a company constitution to require only one director is a cheap but very effective way of reducing risk.

8. CROSS COLLATERALISATION.
‘What is this’ I hear you say? This is where personal or investment assets are used as security for the business. Where this occurs your asset might be structured in the right way but still be subject to your business risk. It’s important to sometimes consider what is more important and to look at when the business will stand on its own two feet.

There are times when you may need to do this but does it really make sense to always have all assets cross collateralised? Approach your bank and understand the lending criteria.

This is only a short list of some of the common problems that I see from time to time in building & construction and property development businesses. Asset protection is all about protecting your family and business from the types of business and personal events that happen from time to time.

Are you prepared? If not it might be a good time to do a financial health check.

Why not give me a call on 07 3193 3000 or email on m.garrone@businessdepot.com.au

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Michael Garrone
read more by Michael Garrone

Michael is our Tax Specialist Director as well as the head of our business advisory niches of Building and Construction and Property.

With Michael's extensive experience and a real interest in these niche areas he is able to provide practical business and tax advice that is unique to the Building and Construction and Property industries. His tailored advice helps guide these businesses through start-up phase to succession and sale. Michael has many years’ experience in solving complex problems involving corporate tax, restructures, international taxation, Capital Gains Tax and GST. 

Michael also has a strong background in self-managed superannuation and is an authorised representative of superannuationDEPOT. In this area Michael provides strategic advice on SMSF structures and in particular limited recourse borrowing arrangements. Through this diverse experience Michael has developed expertise within a wide range of industries including building and construction, property, professional services (legal, engineering & finance), technology and software and manufacturing.

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