When you start your business, two key considerations should be top of mind: limiting your liability and protecting your assets.
A robust risk management and asset protection strategy often involves separating your business risks from your assets. This can be achieved through a dual-entity structure. In this setup, one entity—the Operating Entity—handles day-to-day business operations, while another entity, such as a trust, self-managed super fund, or a different company, owns the business assets (the Asset Owning Entity). The Asset Owning Entity leases, licenses, or loans the assets to the Operating Entity.
This arrangement ensures that if the business fails and incurs debt, the assets remain protected as they are owned by a separate entity. However, for this strategy to be effective, there are two critical steps that must be meticulously followed, both involving essential documentation.
Step One: Formalise Agreements Between Entities
To implement this asset protection strategy effectively, it’s vital to have formal lease, licence, or loan agreements between the Operating Entity and the Asset Owning Entity. These agreements should explicitly state that the assets are owned by the Asset Owning Entity and are merely used by the Operating Entity.
Important Reminder: Don’t cut corners with this paperwork! Avoid reusing old agreements or oversimplifying the documentation. Proper legal advice is crucial here. These agreements should detail the assets involved and any fees payable by the Operating Entity to the Asset Owning Entity. In the event of insolvency, a liquidator will scrutinize these arrangements, and inadequate documentation could result in assets being claimed by creditors.
Additionally, improper documentation can lead to negative tax consequences, including Division 7A issues and Capital Gains Tax (CGT) complications. We can refer you to suitable lawyers with expertise in this area.
Step Two: Register the Security Interest
The Asset Owning Entity must register its security interest in the business assets with the Personal Property Securities Registry (PPSR). The PPSR serves as a public record for interests in personal property, including the business assets.
Failure to register means that third parties interacting with the Operating Entity might wrongly assume it owns the assets. According to insolvency laws, if the Operating Entity collapses without proper registration, the assets can be used to settle its debts, despite not being owned by the Operating Entity.
To protect the Asset Owning Entity's rights and ensure it can reclaim its assets if the Operating Entity fails, registration on the PPSR is essential. If this step is overlooked, the asset protection strategy will be compromised.
Note that while real estate should also be owned by a separate entity, it cannot be registered on the PPSR. Instead, real estate ownership is documented through the land title system.
For guidance on registering your security interest, it is best to obtain legal advice from a lawyer who specialises in this area.
Don’t forget: Plan for Succession
Don’t forget succession planning when setting up these arrangements, particularly with in-house loans. While you are alive, you likely manage these entities within your family. However, upon your death, control over the debtor and creditor roles may shift to different, potentially conflicting, parties. This could cause financial strain or disputes within your family.
Ensure your lawyer documents the terms of in-house loans to allow sufficient time for repayment and to prevent any adverse consequences in your estate planning.
For further assistance with asset protection or to discuss any aspect of these arrangements, contact Symmetry Accounting & Tax on 0420 970 369 or email us.
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