The 3 Main Asset Protection Structures in Australia Explainedamir@propertytaxspecialists.com.au
An important part of any business is ensuring you are protecting assets that you hold as investments. You can do this by setting up the appropriate structures to safeguard them against various risks, such as dramatic market changes, bankrupt debtors, personal injury, and a worldwide pandemic.
If the last two years have taught us anything, it is that you need to safeguard your personal assets beyond simply taking out an insurance policy.
One of the best ways to do this is by creating an adequate asset protection plan. Now, this doesn’t mean you should set up a family trust to defeat creditors and their rights, as that is illegal.
While it’s always best to consult a qualified professional to help you establish a plan in light of your financial circumstances and objectives, here is a list of the three best asset protection strategies in Australia.
Why is Asset Protection Strategies Important for Investment Properties and Personal Assets?
Creating an asset protection structure is an important consideration for any real estate investor. There are a number of ways to protect your assets, but one of the most common ways is to make sure your property is properly insured. This will help to cover the cost of any damage that may occur.
However, insurance coverage is limited. So you need to ensure you account for asset protection from a legal perspective too. For example, another way property investors can protect their assets is to create a legal structure that separates their personal assets from their business wealth.
This can be accomplished by setting up a limited liability company, a trust, or even a self-managed superannuation fund.
By taking measures to protect your assets, you can minimise the potential for financial loss and help ensure the stability of your investment.
Asset Protection Structures Australia
Here are Australia’s three most effective asset protection strategies that you should consider implementing.
Low-Risk Spousal Ownership
One popular asset protection strategy in Australia is to have a low-risk spouse own the property. This can help to shield assets from creditors in the event that the high-risk spouse is sued or falls into debt due to various business ventures.
Francesca and George originally purchased their first property as joint tenants. George is an employee in a stable, high-income job, and Francesca recently started her own e-commerce business.
After a year of becoming a business owner, Francesca has already started projecting six-figure profits. As her business continues to grow, she has had to employ staff and establish a proper office environment. But as her business continues to grow, her liabilities do too. Besides financing the new warehouse and office space, she has also had to purchase a range of business assets.
Unfortunately, this makes Francesca far more high-risk than George, who is employed at a financial institution.
After consulting with Property Tax Specialists, they were able to implement a few asset protection strategies, including transferring the property into George’s name. Now that he owns the property, the asset is better protected, after legal timeframes, should Francesca’s business run into any financial or legal trouble.
Using Discretionary Trusts to Protect Your Assets
A discretionary trust is a legal arrangement in which assets are held by a trustee for the benefit of one or more named beneficiaries. The trust essentially owns the property, and the trustee has discretion over how and when the trust income is distributed, which can make it an attractive option for asset protection.
Discretionary trusts are often used by Australian property owners to protect family wealth from creditors, taxes, and estate planning.
When properly structured, a discretionary trust can be an effective way to shield assets from outside creditors and reduce the overall tax burden on a family.
However, there are also some risks associated with setting up discretionary trusts. For example, while the property is protected from outside creditors, it’s not protected from trust creditors. Further, trusts have a variety of legal obligations that they need to fulfill in order to remain compliant. So it is important to seek professional advice before establishing one.
Considering a Company Structure
If you’re a sole trader or partner in a partnership, you might want to consider restructuring your ownership structure if you are the legal owner of any investment property. That’s because you’re personally liable to settle debts owed by your business, which means you have virtually no asset protection.
One way to protect your assets is to set up a business structure such as a company.
Companies are separate legal entities. That means the company, not the owners, is liable for the company’s debts. So if the company can’t pay its debts, the creditors can’t come after the owners’ personal assets. This is, among other things, as long as the company was not trading insolvent or directors or shareholders gave personal guarantees.
The best option for you will depend on your individual circumstances, so it’s best to seek investment advice as well as financial advice if you’re considering a company restructuring.
While it may seem daunting, the process of protecting your assets is achievable and easy to set up.
This article has provided you with some valuable information on what property asset protection entails and how it works. However, there is no one-size-fits-all solution when trying to protect your assets.
So the best place to start is by consulting with an asset protection specialist to put together a plan that will best suit your needs. Beyond that, many of these strategies generally have several tax benefits as well. So it pays to have a tax expert in your corner as well.
Property Tax Specialists is a leading property tax advisory company with decades of combined experience. We have deep expertise and cutting-edge knowledge to help you make informed decisions about your financial future.
We combine our understanding of how taxes impact property investments with a range of strategies that can be tailored to meet individual needs or circumstances. We also provide advice for property ownership and loan structuring, as it is the best way to make sure your property and wealth are protected from adverse events.
If you would like to discuss one or more of these asset protection strategies and how they can help you legally minimise your tax obligations, get in touch today.
DISCLAIMER: This information has been prepared without taking into account your objectives, financial situation, or needs. Because of this, you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation, or needs.
Amir Ishak is a Limited Authorised Representative 1269908 of Merit Wealth Pty Ltd, Australian Financial Services Licence 409361, ABN 89 125 557 002