Effectively managing risk is critical for all modern business owners. In many ways, the level of risk associated with operating a successful and compliant business in Australia has never been higher – particularly having regard to current economic and business conditions. All business owners should take stock and consider how their involvement in business might also impact their personal lives.
'Asset protection' is a general term which encompasses a broad range of planning activities directed towards reducing risk exposure of business owners and other individuals – effectively, by seeking to limit a potential creditor's ability to access assets or value. Such planning might involve:
- isolating assets or separating value from risk (for example, housing passive income-producing assets in separate structures to risky investments or business operations);
- segregating multiple sources of risk, to ensure that one activity does not expose unrelated activities to risk (e.g. carrying on separate businesses in separate structures); or
- limiting the number and value of assets held by 'at risk' individuals (e.g. protecting valuable assets held by 'at risk' individuals by way of transfer to lower risk entities, or other methods).
Planning appropriately for asset protection allows individuals and family groups to retain their ability to control or benefit from assets, whilst ensuring that family wealth and other passive assets are protected from other liabilities or potential claims made by creditors – even if a creditor is a successful litigant.
While it is certainly possible to restructure affairs to reduce overall exposure to risk, there may be adverse tax implications that arise as a result of such restructure. Often the most substantial costs in restructuring include income tax (including CGT) and stamp duty. As a result, the cost of implementing asset protection strategies may discourage business owners from pursuing an optimal strategy and many clients are unwilling to incur substantive upfront cash costs in order to create what may seem to be, in effect, a very large 'insurance premium'.
However, the current economic climate may now pose an opportunity to move assets between structures – for example, from individual names to a trust, or moving assets out of a trust to another entity which offers greater asset protection and achieves a separation of those assets from others held on trust.
Where there are still significant tax and duty costs associated with simply transferring assets for asset protection purposes, there are other more tax-effective measures which can be used to achieve effective outcomes. For example, a 'gift and loan back' arrangement involves transferring the value (or equity) of an asset or entity from a high risk to a low risk structure, without transferring title in the asset. In a succession planning context, a similar loan arrangement could also be used to create certainty for the outgoing generation upon the transfer of valuable assets, but also ensure asset protection for the next generation assuming control or ownership of valuable assets.
There are other significant considerations when implementing these types of arrangements, including funding of the arrangement, valuation of assets, loan facilities, documentation, obtaining an existing financier's consent to the registration of security and clawback periods under bankruptcy rules.
Unsurprisingly, strategies which look to transfer assets or value upon, or prior to, insolvency will be ineffective – it will always be too late to implement asset protection strategies when creditors are 'knocking at the door'. In these circumstances, it would be prudent to seek specific advice concerning the impact of the insolvency or bankruptcy to ensure any strategy which is implemented will be effective.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.