When contemplating a property, business or other asset acquisition, asset protection must be an important consideration.
Many self-employed people and those in positions of responsibility are conscious that personal assets are exposed. Once there is a threat to assets it is often too late to protect them.
So, protecting assets includes determining the appropriate structure to hold them.
When purchasing an asset such as a business or property it is vital to:
• Ensure that capital injections into an asset purchase, generally in the form of loans, are secured over the assets of the business venture or the specific property where possible.
• Hold the asset in the appropriate legal entity – talk with your lawyer, accountant, adviser.
• Where possible, avoid spouse/personal/director guarantees, which expose personal assets.
• Ensure all strategies are properly documented.
An asset can be held in your own name, a partnership, trust or company. Each can have differing tax and asset protection implications. This often means some longer term thinking around how long the asset will deliver a benefit.
In matters of protecting assets it is best to be prepared for the worst.
Should there be a threat of legal proceedings, generally a spouse’s assets won’t be caught in a bankruptcy or liquidation matter if:
• The spouse has not guaranteed the debts of the spouse in the business.
• The spouse’s assets have not been mortgaged to secure your debts.
• They are not a partner to a business under attack.
• The spouse’s assets were legitimately acquired by the spouse and were not transferred to the spouse to avoid creditors etc.
One strategy is for the partner of the person exposed to risk to hold the property in their name. At the outset, this is only effective where the spouse holding the assets is not exposed to any risk themselves.
Is this effective? There is a raft of common law that provides insights into what happens under litigation.
A good guiding principle is from the English case Ex Parte Russell; Re: Butterworth (1882) 19 ChD 588 at 598 where the Court noted that:
A man is not entitled to go into a hazardous business, and immediately before doing so settle all his property voluntarily, the object being this: “If I succeed in business, I make a fortune for myself. If I fail, I leave my creditors unpaid. They will bear the loss.” The object of the settlor was to put his property out of the reach of his future creditors [whilst] engaging in this new trade. That cannot be done by a voluntary settlement. That is, to my mind, a clear and satisfactory principle.
Purpose is therefore key. Transfers that are void include:
(1) A transfer of property by a person who later becomes a bankrupt (the transferor) to another person (the transferee) is void against the trustee in the transferor’s bankruptcy if:
(a) The property would probably have become part of the transferor’s estate or would probably have been available to creditors if the property had not been transferred; and
(b) The transferor’s main purpose in making the transfer was:
(i) to prevent the transferred property from becoming divisible among the transferor’s creditors;
(ii) to hinder or delay the process of making property available for division among the transferor’s creditors.
Showing the transferor’s main purpose in making a transfer:
(2) The transferor’s main purpose in making the transfer is taken to be the purpose described in paragraph (1)(b) if it can reasonably be inferred from all the circumstances that, at the time of the transfer, the transferor was, or was about to become insolvent.
Other ways of showing the transferor’s main purpose in making a transfer:
(3) Subsection (2) does not limit the ways of establishing the transferor’s main purpose in making a transfer.
Whilst there is no absolute strategy to keep all assets safe, the best advice is to start with the optimal structure in the first place. Get your affairs in order at the outset, as opposed to taking corrective action in the future.
Domestic partners often transfer property between each other. The process and paperwork is relatively simple, subject to whether a current mortgage exists on the property.
There was previously a blanket exemption from stamp duty for all transfers of real property between spouses in Victoria; however, from 1 July 2017, this exemption was removed for transfers involving consideration and/or in relation to investment properties.
This exemption from duty therefore only remains for transfer of a principal place of residence, or following a relationship breakdown. This change also highlights the importance of getting the right structure in place at the time of acquisition.
For more information:
p: (03) 9620 2001