You’ve worked really hard for a long time, made big sacrifices…family time, early mornings, late nights, taken risks and it has paid off. Time for you to enjoy the fruit of your labour that has been made possible by your sacrifices.
Unexpectedly something comes out of the woodwork and you find yourself in a legal battle. You didn’t expect this and suddenly everything you’ve worked so hard for could be gone. Have you done everything you can to protect your assets?
The above sounds like the narrative of a TV drama. Unfortunately, life is stranger than fiction and as advisors we see situations like this all too often. It may not be something out of the woodwork, it may be a product you sell on behalf of someone else that is defective, or a wayward child with substance abuse issues, or the divorce of a child, or death of a business partner. What’s common in all these examples is none of it is within your control. The longer you’ve walked on this planet, the more you realise how little you really control…
When this occurs everything takes on new perspective and how well you’ve protected your assets will be something you very seriously ask yourself.
The fundamentals of asset protection are not complicated. Some of the basic considerations are:
- Someone takes risk and another takes no risk
- The person who owns the assets should not take any risk
- Only the person taking risk should be the director
- Have you used companies and trusts as a business vehicle to protect assets and ring fence liability
- Have you separated ownership of assets from operation of businesses (a failed business could expose the assets if you have not)
- If you have signed personal guarantees you have taken risk beyond director’s responsibilities
- If you have put money into a partnership, company or trust, was it a loan or capital (do you understand the difference?)
- Have you considered protecting money you have lent to a partnership, company or trust by using a General Security Agreement (GSA) on the PPSR
- Have you registered your assets on the PPSR when you plant is on a client’s site (if the client goes under possession is 9/10th’s of the law unless you have registered the plant on the PPSR)
All too often a number of the above measures have not been implemented, and when things go south it may be too late.
There are some things you can’t protect yourself from:
- Not paying superannuation for your employees
- Not paying PAYG withholding for your employees
- Trading whilst insolvent (you can’t pay your debts as and when they fall due)
- Your spouse (Family Law looks through every structure)
There are also proposals to extend GST liabilities to directors of companies following a number of high profile “phoenix” schemes where the ATO was forced to write off tax debts and the company “rose from the ashes” in another form shortly after.
When it comes to asset protection, time is your friend. Following a spate of high profile cases in the 2000’s insolvency laws were changed. Dispositions or transfers of assets can be clawed back by liquidators and trustees in bankruptcy for up to 5 years. The earlier you start the asset protection process (particularly when the business is strong and solvent), can’t be more highly recommended.
What should I do (not an exhaustive list)?
- Review directorships
- Check who owns the family home
- Check whether you have separated investment assets from business operations (or even key business assets from the trading business)
- Check who you have personal guarantees been signed with
- Review what the bank has secured
- Examine your balance sheets and loans to/from your companies and trusts
- Consider restructuring with holding companies to shift profits and reserves away from trading companies
- Where practical put in place General Security Agreements (GSA’s) for monies lent to your entities
- Register assets on the Personal Properties Security Register (PPSR)
- Considering paying out children what is owed to them in your trusts (unpaid distributions)
- Consider the adequacy of life insurance for both yourself and your family and business partners
- Review your wills
Please contact your key contact person in Moore Stephens to discuss this further.