Protect your assets without falling into tax traps

Protecting your assets against frivolous creditors is increasingly becoming a common concern.

It has been quoted that Australia is closely following the trend of USA litigation numbers with NSW, Victoria and Queensland only just behind California where 1 in 3 people in the USA either sue someone or are being sued by someone.

Traditionally people have used trusts to protect their assets.

A trust is useful in this regard as the individual does not own the asset; it is owned by the trust.

Therefore if the individual is sued they have no assets to lose.

The individual controls the trust but has no ownership.

Typically assets were owned by either a company or trust (normally a discretionary trust or family trust).

The problem with a company is the individual usually is the shareholder so they could lose the shares in a successful lawsuit and therefore the assets.

The other problems with a company are it does not receive the 50% general Capital Gains Tax discount, it is inflexible on who can receive distributions plus if the asset was negatively geared the individual could not take advantage of the tax credits of the negative gearing.

The use of a discretionary trust gives asset protection and the ability to claim the 50% CGT General Discount but again did not give any tax credits to the individual for negatively geared assets.

Land tax is also a concern in that NSW does not receive the land tax threshold and Victoria only receives a $20,000 threshold.

Trusts and companies in the way they are typically used do not allow an individual to receive the main residence tax concessions or any first home owner’s concessions which would apply if the family home is held in the individual’s name.

All the above can make things very confusing and without very specialized advise many people built up their wealth in their own names.

With changing views on asset protection and estate planning many people re now re looking at how they own assets and are looking for strategies to give them asset protection.

While it is true that people believe they will never be sued or if so they have adequate insurance the facts suggest a different answer in reality.

For assets to be acquired the use of trusts can be an easy decision but the question is “how do I now protect my assets which have been purchased in individual or company name”.

A simple solution is to sell them to a trust but that is not without a substantial cost. When you sell assets you pay tax on the profits and you would also need to pay stamp duty which again is substantial on property.

You may also need to refinance if you have debt as the “legal owner” of the asset changes and if the finance market is tight this refinancing may not be easily completed.

So what do you do?

Chan & Naylor have developed a number of strategies that can assist its clients wanting improved asset protection and estate planning ranging from simple solutions for assets which are low in number or value ie the family home and one investment property to more complex solutions for larger asset bases where an individual wants both asset protection, estate planning and the ability to redirect who receives distributions.

All four strategies do not trigger capital gains tax and in most cases does not trigger any stamp duty on the underlying assets.

Key to these strategies is the fundamental notion that when being sued people want your money not the bricks and mortar or other physical asset that you have. Therefore you must protect your equity (net worth) not the actual assets.

1. Equity Shift

This solution allows an individual to shift the equity as opposed to the asset from an unsafe environment to a much safer environment. Assume the person has a family home with significant equity (market value less debt) and wishes to purchase an investment property.

A properly arranged loan will allow the investment property to be purchased in a Property Investor Trust®, while still allowing the individual to claim any negative gearing and have the debt which would have been allocated to the investment property to the home.

The interest on the debt if structured correctly is still fully tax deductible as the purpose of the loan is for investment. This leaves no equity on the home and shifts the equity into the Property Investor Trust® were it is protected. No CGT or stamp duty is triggered on the asset.

2. Equity Bank Trust

This trust structure and relevant agreements is designed to assist clients with a more substantial asset base including properties.

The EBT takes on the role of a lender and places a second mortgage on your assets thereby reducing to nil your equity.

It is your equity which a law suit goes after not the asset so the protection of your equity (net wealth) is the primary consideration.

No CGT or stamp duty on the assets is triggered. Depending on the second mortgage documentation there may be a stamp duty on the mortgage document in some states which is a small percentage of what would be the case on the asset.

3. Family Estate Agreement

A will is essentially your wishes on how your assets are to be distributed on your death. If you are sued the will cannot protect your wealth.

If a court action by unsecured creditors successfully takes your wealth then the will has nothing to pass on.

The Family Estate Agreement is a multie part process which creates a legal binding obligation to move ownership of your assets and therefore your net wealth on death to a specially designed family lineage trust to ensure your assets stay within the family and not to in-laws etc.

If sued prior to death then it is this contractual obligation that is used to protect the assets in that you effectively have passed on the ownership of the assets at the time of the contract. . No CGT or stamp duty on the assets.

There may be a small stamp duty on the documentation depending on the location of the assets as different states apply stamp duty on documentation. This strategy is more complex than the previous two and normally used for clients with larger net asset values or more complex assets.

4. Business Restructure Trust

A more complex strategy for those with significant assets including business assets or the shareholding in a company operating the business.

This strategy allows the transfer of assets to a trust without CGT and also maintains the pre CGT status of any assets a very valuable benefit. This strategy creates asset protection as the assets are now in a trust. Once in the trust any income or profits are capable of being directed to other individuals or trusts. Most states other than Queensland would have no stamp duty applied.

5. Main Residence Trust

As an additional strategy clients who believe they are in a high litigation risk environment can purchase their family home in a trust and still receive the normal main residence tax benefits including nil land tax and in some instances no additional stamp duty on the property purchase. In some states a second stamp duty may apply but this cost may be offset by the other advantages.

Interest deduction on borrowed moneys used to purchase the property if used for personal reasons eg your home would normally not be deductible but maybe depending on the circumstances.

Care must be taken in the drafting and execution of these strategies and in particular the relevant claw back provisions of the bankruptcy legislations which would require a four year waiting period from the commencement of the strategy until asset protection is fully available.

This time period is the window in which a receiver in bankruptcy can go back to unravel any strategy.

Appropriate documentation should also be prepared and executed showing solvency statements and the confirmation that there are no potential litigations pending. The cost of the various strategies must also be considered against the benefits.

Disclaimer

The paper below is general information only and is intended as educational material. Chan & Naylor nor its associated or related entitles, directors, officers or employees intend this material to be advice either actual or implied. You should not act on any of the above without first seeking specific advice taking into account your circumstances and objectives. 

 

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About

Ken is director of Metropole Wealth Advisory and gives strategic expert advice to property investors, professionals and business owners. He is in a unique position to blend his skills of accounting, wealth advisory, property investing, financial planning and small business. View his articles


'Protect your assets without falling into tax traps' have 7 comments

  1. Avatar for Property Update

    January 21, 2017 rankin

    Hi

    I have a situation for capital gain in small business, i need some guidelines to make sure I am doing the things in a right way.

    We have a company where Me and my wife are equal share holder, she is the director and i am the secretary in that company.

    we sold the small business and get some capital gain in the company and choose 50% Active asset reduction, then we choose the rollover feature to postpone the capital gain tax liability.

    we realise that we need trust where the existing company can act as a trustee of the company, and we are planning to create a trust.

    Now if we are planning to buy some active asset like a house to run a Bread and breakfast business under the new trust.
    so please advise the following :
    1) Its ok to create a trust and the trustee will be the existing company.
    2) The trust can use the cash reserve of teh company to buy a new active asset for the new business.
    3) When the trust will buy an active asset , its fulfilling the rollover condition.
    4) and in future we can submit zero tax return for the company and the gst and tax will be paid by the trust and trust will have a separate abn and tfn.

    Reply

    • Avatar for Property Update

      January 21, 2017 Michael Yardney

      Rankin. What you are requesting is very specific tax advice about your personal situation and as you can imagine, that is beyond the scope of this website.
      However, your questions are very important and you should consult your accountant to get answers, or if you like have a chat with Ken Raiss at Metropole Wealth Advisory – these are areas he specialises in. http://metropole.com.au/wealth-advisory-service/

      Reply

  2. Avatar for Property Update

    October 14, 2013 Tina

    What would be the best strategy for an elderly widowed father to ensure assets go to his chosen beneficiaries with minimal or no tax and duty obligations for beneficiaries upon his death?
    Also, if he were to remarry, but wanted his original assets to go to his non-dependent children and not the new partner, would a family trust be the best option?
    Assets would be primary home, furniture, car, and possibly investments.
    Thanks

    Reply

    • Avatar for Property Update

      May 14, 2016 Annette

      I have the same question did you get an answer to your question? Especially the part about if he were to re marry.

      Reply

  3. Avatar for Property Update

    August 10, 2012 Lesley

    Hi,
    If I own 2 properties in a trust, how do I use the equity in these properties as a deposit on the purchase of a new property in a new trust?

    Thanks

    Reply

  4. Avatar for Property Update

    May 12, 2012 Pascoe

    I was wondering, as an example. If I had 5 investment properties in my own name with no asset protection and hadn’t got around to protecting them as in the above article, then someone sues me, is it then too late to setup any of these structures to protect the properties.

    Reply

    • Avatar for Property Update

      May 12, 2012 Ken Raiss

      Hi
      Yes it will be too late. The structures need to be set up well before either any actions or before you are aware of a possible action

      Reply


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