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The ideal structure is not intended to be an off-the-shelf solution for your finances – there is no one solution that will suit every circumstance. Asset protection strategies are about creating a customised solution that meets the unique requirements of each person’s business, investments and goals. All that this model is intended to demonstrate is how the best elements of different structures can be combined and leveraged to create a solution that provides excellent asset protection and meets the criteria of having you own nothing, while controlling everything and still accessing the financial benefits of your assets.

Asset Protection Problems With Common Comparison Structures:

•    Sole Trader:

  • Personal liability thus personal assets are at risk.
  • Transferring assets or the business to another entity can be very costly as a result of legal fees, stamp duty, GST, CGT and other taxes.
  • As an employer may be personally liable for negligent acts of employees.

•    Partnership:

  • Each partner is liable for the debts of the partnership so that if the partnership property is not sufficient to pay the partnership debts then the partner’s personal property is at risk.
  • An individual may be personally liable for the negligence or wrongful acts of a partner.

•    Company:

  • Generally a company provides limited liability.  However, if a professional is personally negligent they may still be personally liable even though they run their practice through a company.
  • Directors of a company can be personally liable for the company’s debts in certain circumstances.
  • Who owns the shares in the company?  If they are owned by an individual then they are an asset of the individual.  Generally an accountant will be required to own shares in the practice company, thus if the accountant will be required to own shares in the practice company, thus if the accountant is sued personally for something that is not business related the business assets are at risk.
  • On divorce changes in directs and shareholders may be required.

•    Unit Trust:

  • If units are owned by the principal and the principal is sued then the business assets are at risk because the units are assets available to a trustee in bankruptcy.
  • Who is the trustee?  Who controls the trustee?  If it is the principal and they go bankrupt the trustee in bankruptcy may be able to takeover control of the trust.

•    Discretionary Trust:

  • Who should be the trustee?  If the trustee is an individual and is made bankrupt, can the trustee in a bankruptcy then control the trust?  This is addressed later in these notes.
  • Who should be the appointor?  If the appointor goes bankrupt can the trustee in bankruptcy appoint a new trustee and control the trust?  This is addressed later in these notes.
  • If the trustee is trustee of more than one trust are the assets of the first trust “available” to creditors of the second trust?  This is addressed later in these notes.

Partnership - Advantages:

  1. Less costly to establish than a company or a trust.
  2. Inexpensive to run.
  3. Taxpayer understands structure.
  4. Can provide some flexibility in the partnership agreement.
  5. Income splitting between partners.
  6. Some tax planning possible with the use of “partners’ salaries”.
  7. Partners can obtain 50% CGT discount.
  8. Small business CGT concessions easily obtained.
  9. Partnership losses “distributed” to partners to be offset against other income.
  10. Flexibility for CGT in that each partner can independently choose the concessions they want.  Failure by one partner to satisfy the conditions will not affect the other partner.
  11. Flexibility and asset protection can be obtained by using trusts as partners.
  12. Independent parties can be easily admitted as partners.
  13. Trading stock and depreciable asset roll-over relief available on the admission of partners.
  14. Tax planning opportunities available in respect of the refinancing of the partner’s capital accounts by borrowed funds.  Refer TR 95/25.

Partnership - Disadvantages:

  1. The partners are jointly and severally liable.
  2. Generally no asset protection.
  3. New personal services income laws may attribute all income to one partner for tax purposes.
  4. Income cannot be accumulated and must be assessed at personal tax rates.
  5. Complex PAYG instalment calculations.
  6. If partnership registers for GST, then partners cannot use the GDP method of PAYG calculations expect where the partnership’s turnover is less than $1 million.
  7. Partners cannot claim input tax credits when paying partnership expenses.  Complex reimbursement procedure must be followed so that the partnership can claim the input tax credit under Division 111 GST Act.
  8. Partners cannot be employed by the partnership for salary packaging purposes.
  9. Partners cannot claim a deduction for interest on borrowings to pay income tax, whereas, individuals and other business entities can.  Refer IT2582 and TD2000/24.
  10. Deductions for superannuation contributions are restricted in the same manner as they are for individuals.
  11. The non commercial loss rules in Division 35 apply.
  12. The substantiation rules apply to car and travel expenses.

Asset Protection Strategies