If you don’t currently have an asset protection strategy in place, ask yourself how easy it would be to access your assets if you were subject to an unforeseen legal action. Don’t risk everything you’ve worked to create.
Structures are the means through which you can achieve the objectives of asset protection. There are many different types of structure, which each offer different levels of asset protection, and we’ll take a brief look at some of the most commonly used structures below.
There are two important considerations when dealing with business structures: the ?rst is that it is important to establish a strategic direction for your structure as early as possible because it can be costly and complicated to change structures once established; and the second is to be aware of the need to recognise the trade-offs that may be required between structuring for asset protection and tax minimisation. If you structure solely for asset protection, without considering tax, you’ll probably end up paying more tax than you need to. Likewise, if you structure solely for tax bene?ts, you probably won’t end up with the asset protection that you need. There are many choices and trade-offs that you will have to make in order to achieve the appropriate balance and these should be considered with expert advice from specialists.
The most common types of business structure include:
Individuals (sole traders).
This is a simple, inexpensive business structure in which there is no distinction made between the individual and the business – the individual is the business. The assets of the individual are the assets of the business, so there is no protection, and the business earnings are taxed at the individual’s marginal tax rate.
Partnerships.
Another quite simple and inexpensive business structure.
The partnership may be between two individuals, two entities (such as a company or trust) or between an individual and a business entity. Again, there is no distinction made between the individual’s assets and the assets of the partnership, so there is no asset protection. In fact, a partnership exposes each individual to potential liability for actions taken by the other. Earnings of the partnership are taxed at each partner’s marginal tax rate.
Companies.
The most signi?cant difference between a company structure and the previous two is that a company has its own legal identity. The company is not the people who own it – it has its own assets, its own liability and its own rate of tax. It offers asset protection bene?ts because the owner’s assets are separate from the company’s assets (although individual directors can be personally liable for negligent or fraudulent activities conducted by the company). Companies pay a lower rate of tax (30 per cent) than many individuals.
Trusts.
Trusts are one of the most ?exible, yet most misunderstood and under-utilised structures available. There are a number of different types of trust structure, including unit trusts,
discretionary trusts and hybrid trusts. The primary difference between trusts and companies is that trusts don’t pay tax on their income, but all of their income must be distributed to bene?ciaries (which may be individuals or companies) and the bene?ciaries must then pay tax according to their marginal tax rate on those earnings. Trusts offer excellent asset protection because they are a structure within which ownership of an asset can be held for the bene?t of the bene?ciaries, without the bene?ciaries actually owning the asset. This is a complex subject, which you should discuss with a specialist.
Self-managed superannuation funds (SMSFs).
These are actually another type of trust. Because of their nature they are very heavily regulated, but they also offer excellent asset protection and tax advantages. Because their purpose is to preserve assets for your retirement, SMSFs are extremely dif?cult to get assets out of, but they are subject
to only 15 per cent tax on income. SMSFs can be used to excellent advantage, but they are complex and should be discussed with a specialist.
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