Australia is now considered one of the most litigious nations in the world. Consequently, with increased numbers of individuals working in either professional fields or operating small businesses asset protection is vital, yet often overlooked.
Asset protection is the process of legally protecting business or personal assets in the event of bankruptcy, creditors’ claims or divorce. A well-developed plan should consider tax minimisation and estate planning and be adhered to on an ongoing basis.
Asset protection is not a one size fits all approach. There are several strategies available and consideration should be given to the specific needs of each client. Some options available include:
1. Principal Place of Residence
Transferring the principal place of residence to the spouse. When applying this strategy consideration should be given to:
a. Stamp duty – transferring to a spouse may result in stamp duty; and
b. Estate planning – if the spouse passes away the asset could once again be at risk if transferred back to the surviving spouse.
2. Limited Liability
Utilising the limited liability nature of companies, in particular for owners of businesses and/or real estate. It is important to note that companies do not receive the 50% capital gains discount available to individuals when disposing of an asset held for 12 months or more.
3. Service Trusts
By placing assets within a service trust, it quarantines them from the business structure and thereby safeguards the assets in the event of litigation, creditors etc. Service trusts are often used by medical practices and professional service firms such as accounting and law practices. Service trusts can also have taxation benefits.
Aside from the benefiting from the lower tax rate of a super fund, members are also granted the benefit of asset protection. Assets within a superannuation fund are quarantined from creditors.
It is important to note that contributions that are made (or seen to be made) for the purpose of defeating a bankrupt’s creditors, whether they were made by the bankrupt or by a third party on behalf of the bankrupt, may be recoverable under the Bankruptcy Act 1966.
5. General Insurance
Ensuring you are sufficiently insured is another way of protecting your assets. If you work in a field where you are more likely to be sued, ensuring that you have sufficient cover will guarantee that creditors are kept away from your personal assets.
Timing is everything, putting the right structure into place sooner rather than later and adhering to it on an ongoing basis will ensure that you mitigate risk to the extent permitted by law. If left too late assets may remain exposed to potential creditors for longer than they need to be. It is important to keep in mind the clawback provisions within the bankruptcy act when applying asset protection strategies. The primary purpose at the time an asset is transferred cannot be to prevent the asset from being distributed to creditors.