What is Asset Protection?
Asset protection is a proactive set of safeguards and strategies to protect personal wealth and assets.
If you are operating a business, you are likely to be exposed to a number of risks from unexpected events including, but not limited to, creditor claims, workplace accidents, lawsuits, insolvency and relationship breakdowns. To shield your personal wealth from these risks, we recommend regularly reviewing your assets and potential risks and implementing or updating asset protection strategies where appropriate.
Protecting your assets does not need to involve complicated (and expensive) business structures. Often, the process is as simple as reviewing your current business and considering the available strategies to best reduce potential risks.
It is ideal to consider and implement asset protection planning as soon as possible, preferably as part of establishing a new business or when acquiring new substantial assets. As your business and assets grow, your strategies can be revised to accommodate additional assets and new risks.
Strategies to Protect your Assets
Take out appropriate insurance policies
One of the most common strategies for asset protection is insurance. This can be a relatively in-expensive option for all types of entities including sole traders.
Some types of insurance that may be applicable to your business include:
- Public liability: covers the cost of legal action and compensation claims made against your business by a client or member of the public who encounters personal injury or damages to their property.
- Professional indemnity: protects you and your business against claims for alleged negligence or breach of duty arising from the performance of professional services.
- Worker’s compensation: covers your employees’ wages and related costs if they are ever require treatment of work related injury or illness.
However, these policies may only be able to provide limited protection of your assets in specific scenarios and may not be able to protect the assets from circumstances outside of business such as marriage break down.
It is important to understand what the policy does and doesn’t cover. A knowledgeable insurance broker should be able to sit down with you to help you find an appropriate policy to you and your business.
Business and asset ownership restructuring
A popular and effective strategy to protect your assets is to restructure your business and isolate your personal wealth from the trading entity. With the support of a business adviser and the help of a legal adviser, a separate entity may be established to maintain trading operations and keep your personal assets safe from business risks and unexpected events.
Below is a summary of the entities commonly used for asset protection.
- A company is a separate legal entity which means it owns the business assets, separate from the management (i.e. directors) or the owners (i.e. shareholders).
- A company can sue and be sued but has limited liability for the shareholders who are generally only liable for the amount due on their shares.
- It should be noted, a director may be held personally liable for the company in the following situations:
- Breaching director duties under specific legislation such as the ATO’s Director Penalty Regime for outstanding tax and superannuation guarantee obligations; or
- Trading whilst insolvent.
- Another business structure that may present a more tax-effective option to business owners are trusts. Assets held by a trust are owned separately from the individuals that control them. This business structure allows you to separate your business assets and your personal assets, providing protection in the case of unforeseen circumstances.
- Trusts have become an increasingly popular business structure as they are also able to provide some flexibility surrounding the distribution of income. The income of a trust is generally taxable to the beneficiaries which provides more options to utilise individual’s tax-free thresholds and the general discount on capital gains. This business entity may significantly reduce your tax liabilities.
- A trust is not a legal entity but is a relationship where a person (i.e. the Trustee) is under an obligation to hold property for the benefit of others (i.e. the beneficiaries). The trustee owns the assets but the person who determines the trustee (i.e. appointer) has ultimate control over the trust and the assets.
- Trusts are widely used for investment and business purposes as they can limit personal liability.
Succession and estate planning and protecting your legacy
- After a lifetime of hard work, building your business and accumulating your wealth, you want to ensure your legacy will be safe for future generations. It is crucial to establish a succession plan to dictate what happens to your business in the event your circumstances change (i.e. retirement, illness, death etc).
- Further, it is important to establish your estate plan and specify your wishes for your assets within a will. In his article, ‘Estate Planning Step-by-Step – Protect Your Assets & Loved Ones’ Luke Bland lays out all the information you require to start planning what you wish to happen to your assets in the future.
- Read more on Succession Planning and the importance of organising it now to safeguard everyone involved in the business, including if the unexpected occurs.
Other Things to Consider
- A company may not be the most tax-effective structure for your business as it is currently exposed to corporate tax rates up to 30%. Further, a company is not eligible for the 50% general discount on capital gains that individuals and trusts have available.
- Trusts are not often taxed in their own right as the distributed income is taxable in the beneficiaries’ However, the trust may be liable for the tax in certain circumstances such as distributing to a foreign resident or a minor.
- Business and asset ownership restructuring can result in additional taxation and stamp duty imposts that should be considered when developing asset protection strategies (including, but not limited to, capital gains tax and transfer duty).
- Business structures such as companies or trusts may be expensive to set up and maintain, taking into consideration accounting, taxation and compliance costs. Such restructuring strategies may not be cost effective for you and your business.
Who can Help with Asset Protection?
There are many professionals who can review your business and provide advice and support for your asset protection strategies. Everyone’s situation is different so it is important you meet with a business adviser or other professionals who have the expertise to steer you in the right direction.
Will review your business in detail and offer the best possible solutions in relation to your circumstances.
Will work with your business adviser to set up the desired business structures within the legal requirements.
Will review your circumstances and help you decide which insurance policy would be best for you.
Formulating a strategy for asset protection should be included as part of your overall business and financial planning. A good place to start is considering the above strategies so you can determine what is relevant for your situation. Are there things you can do on your own? What areas do you know you need assistance with?
Protecting your assets can often be as simple as reviewing your current business structure and discussing your options with a trusted business adviser or legal professional.
If you are currently investigating a business adviser or accountant to use for your situation, please take a moment to talk with us to gain some clear direction. There is no cost involved in an initial chat with us about your business, and if you feel we aren’t the right fit for you then you .
Wishing you every success!