Avoiding uncommercial borrowing conditions

The ATO has recently warned that SMSF income generated from limited recourse borrowing arrangements (LRBAs) deemed to be uncommercial may be subject to high tax rates.

If a LRBA is found to be uncommercial then all income derived from the related asset can be taxed at up to 45% including rental income, dividends, interest and capital gains.

At this point no detailed guidelines have been released, and LRBAs are being assessed on a case by case basis to determine whether or not the high tax rate will be applied to related income. As such it is advisable to ensure that all loans taken out by your SMSF meet commercial terms. It is also recommended that all documentation is retained in case you are required to provide evidence of commercial loan conditions.

What makes a LRBA uncommercial?

A LRBA may be considered uncommercial if the terms result in a greater return than would be expected from a standard industry loan. Factors that may be considered by the ATO when assessing the terms of a loan include the loan to value ratio, interest rates that are below market value, and unusually long repayment periods.

The ATO has also indicated that LRBAs used to purchase assets with limited material security, for example shares, will be more likely to attract the higher tax rate, as it is unusual for commercial lenders to approve loans for these types of investments.

New penalty scheme for SMSF trustees

From July 1 2014 the ATO will have increased powers to issue a range of penalties to SMSF trustees found to be in breach of superannuation laws.

The new regulations will give the ATO increased flexibility in dealing with non-compliant SMSF trustees. This will improve the ability to deal with cases fairly and appropriately.

Previous Penalties

Up until now the SMSF penalty options available to the ATO have been relatively harsh, including barring a person from being an SMSF trustee and subjecting the fund’s assets to a penalty tax.

As these penalties are disproportionate to many minor infringements by SMSF trustees, they have been used sparingly. As such there was no capacity for the ATO to deal with less serious non-compliance issues. Under the new system, the ATO will be able to apply a range of penalties to SMSF trustees including rectification orders, educational directions and administrative financial penalties. Trustees found to be in violation of superannuation law may subject to any combination of these penalties.

Rectification Orders

If a trustee is given a rectification order, they will be required to undertake specific action to rectify the non-compliance issue. Evidence of the rectification action will need to be provided to the ATO.

The ATO has indicated that it will take into consideration potential financial detriments to the fund that may be expected as a result of the rectification action.

Educational Directions

Trustees who are given educational directions will be required to undertake and complete an education program within a specified timeframe. Again, evidence of completion will need to be provided to the ATO.

While no fees can be charged for trustees who undertake a course as a result of an educational direction, any other related costs (such as travel) must not be paid or reimbursed by the relevant SMSF.

Administrative Penalties

The new administrative financial penalties are the most significant changes to current legislation. Financial penalties ranging from $850 to $10,200 can be issued for each individual non-compliance issue, and must be paid by the trustee personally.

Funds cannot be withdrawn from the SMSF to pay the penalties, nor can the trustee be reimbursed by the SMSF.

Using dividend franking credits

By investing in fully franked Australian shares, SMSF trustees can significantly reduce the amount of tax payable by their fund.

This is because these shares are issued with a franking credit, also known as an imputation credit, which can be used to offset the tax payable by the SMSF.

What are franking credits?

When companies pay out dividends to their shareholders, the income has already been subject to company tax. In order to avoid double taxation, where both the company and the shareholder have paid tax on the dividend, Australian dividends often come with a franking credit. This essentially means that the company tax that has already been paid is awarded to the shareholder as a franking credit, and the shareholder is then required to pay tax on the dividend at their marginal rate.

The benefits of imputation credits are also available to SMSFs who invest in fully franked Australian shares.

Franking credits and superannuation

From July 1 2015 the company tax rate will be 28.5% (cut from 30%), whereas the maximum amount of tax paid by an SMSF is just 15%. This makes acquiring fully franked shares with high yielding dividends an attractive tax break for SMSFs. If a significant portion of the fund’s investment portfolio is made up of fully franked shares, then their net tax bill can be considerably reduced.

If an SMSF receives a fully franked dividend in accumulation phase then the franking credit can offset the tax payable on the dividend. Franking credits can also be used to reduce or eliminate tax owed on any other income from the SMSF including capital gains tax, rental income and concessional contributions tax. If the SMSF has no other taxable income, the ATO provides the SMSF with a cash refund on the company tax paid.

In pension phase, when the SMSF tax rate is reduced to 0%, franking credits become even more beneficial as the entire value of the franking credit is returned to the SMSF.

Franking credits can be particularly advantageous for high income earners seeking to limit the amount of tax paid on concessional super contributions. For individuals earning over $300,000, the tax on concessional super contributions is set to increase from 15% to 30%. Instead of balking at investing additional funds into super, individuals seeking circumvent this tax hike may look at increasing their SMSF’s investment in fully franked Australian shares.

 

New financial year cost savings

A challenging economy requires careful cash management to sustain your business.

Tough decisions are necessary which tend to involve workforce reduction and increased productivity from existing employees, both crucial to examine. However, if businesses look beyond labour, they can often find additional ways to drive meaningful long-term cost reductions. Here are a few areas to consider –

1.  Product lines and customer segments
Many businesses have product lines or customers that fail to generate meaningful profitability, or worse, generate losses. The Pareto Principle — the 80/20 rule — often applies; many find that the majority of their profits are generated by a relatively small number of products or customers. By simply shifting energy from less profitable products or customers to more profitable ones, companies can dramatically improve profitability.

2.  Outsourcing
Outsourcing Many businesses are gaining significant cost and operational efficiencies from outsourcing non core activities. Careful analysis including the proper allocation of on costs and overheads will reveal these functions usually cost much more in dollar terms and distraction that perhaps thought. Areas such as payroll, HR, IT, bookkeeping and even entire finance functions may be better performed by specialists who can deliver volume and expertise benefits to your business allowing your team to concentrate on strategy and execution.

3.  Inventory
Many manufacturers and distributors are still dealing with excess inventory levels, which can lead to unnecessary carrying costs and negative cash flows. The most profitable companies effectively use material requirement planning systems (MRPs) and/or enterprise resource planning systems (ERPs) to reduce inventory levels without running the risk of exhausting supplies.

4.  Suppliers
Businesses can often reduce general and administrative costs through techniques such as supplier consolidation and/or the implementation of formal tender processes. Think about the number of departments or locations using different suppliers for routine products such as office supplies. Then, think about how often purchases of such items are made on an ad-hoc basis without pre-negotiated pricing terms. By consolidating vendors and negotiating terms with selected suppliers, companies can leverage purchasing power to reduce general and administrative costs.

5. Employees
Whether your business has 20 employees or 2,000, it never hurts to engage them in cost-reduction initiatives. Because they are in the trenches, they often have first-hand knowledge of areas of waste. By soliciting their feedback and implementing an incentive system to reward them for cost savings, businesses often decrease costs and increase employee retention.

While there is no single solution for cost reductions that applies to all businesses, learning more about what other businesses have done can spur innovative strategies that lead to long-term improvements in profitability. By tackling these issues now, you can drive near-term increases in profitability and ensure you are prepared for any future economic difficulties.

Chinese investors heading our way

As most of us brace for depths of winter, having recently returned from a whirlwind ten day, invest in Australia roadshow to China things are only getting hotter over there. 

As the Chinese enter their summer my recent travels there taught me that the Chinese entrepreneurial spirit and passion for growth is stronger than ever and things are likely to continue to heat up. What do I mean by this? Well it was obvious to me travelling through cities including Guangzhou, Xiamen, Nanjing, Dalien, Harbin, Jilin, Changchun, Shenyang and finally to Beijing in northern China that the Chinese people and China never stands still.

On a popular Chinese social media site, one of the most-tweeted lines is: “If we don’t pursue dreams today, we will be too old to do so tomorrow.” The pace of change and growth in China is phenomenal and a significant dream for many Chinese is to expand their business interests into other markets while also giving themselves a safe haven for some of their wealth and an opportunity to live or spend an amount of time in a western environment.

The purpose of our trip was to further strengthen our relationships with immigration agents and their clients in these cities. We presented to over 400 interested people during our visit with a number of our presentations sponsored by the private banking arms of Bank of China and HSBC. In our presentations we partnered with an Australian immigration lawyer to outline to these interested people what it is like living in Australia, the business environment, the types of visa’s available and how we can help them and their families with a smooth transition for their business and family lives in Australia.

A poll of Chinese millionaires reveals that 65% of them want to gain permanent residence in overseas Countries. They give various reasons for wishing to do so such as a desire to access better education for their children, a desire to escape the extreme pollution found in much of China and legal uncertainty about the status of their wealth in China. After twenty years of rapid economic growth, it is estimated that there are some one million US dollar millionaires in China. Hurun, a Chinese company based in Shanghai interviewed 400 such millionaires about their attitudes to emigration. The poll found that 65% of those interviewed wanted to leave the country or, at least, to obtain a permanent residence visa which would enable them to live elsewhere if they wished to. 30% of those interviewed had already acquired foreign permanent residence visas.

Australia is an attractive proposition for many wealthy Chinese and it has been reported that Chinese make up 91% of the significant investor visa applications in Australia. And it has never been more attractive. Particularly in northern China the natural attraction for many Chinese has been Canada and the US. For many years Canada ranked among the top choice for Chinese investor-immigrants given its relaxed immigration policies and generous health and education systems. But in February this year Canada scrapped its longstanding Immigrant Investor Program, which allowed individuals to effectively gain permanent residency. Australia is a real alternative for these disheartened people and as we moved through China we spoke to many who will now proceed to an application in Australia.

The Australian significant investor visa program which was announced in 2012, has so far had 1,446 EOI’s (expressions of interest), 928 Applications and 255 SIV Grants been issued as at 31 May.  The approval rate has climbed from 29 to 40 per month over the past two months and the Government has recently announced they are looking to speed up the typical 4 to 6 month application process to further encourage applications. The visa and permanent residency requires an applicant to invest $5m in Australia, be that in an active trading business or approved managed funds / cash assets. The invested funds need to remain in Australia for a period of four years and the applicant is required to spend 160 days in Australia over four years before gaining permanent residency.

While there are other compliance obligations regarding verification of source of funds and other financial and tax requirements the visa in itself is relatively free of red tape if the applicant has the capital to invest.  At our presentations we discovered that there were numerous individuals who found this proposition very attractive and there are a number of individuals proceeding to application stage. Australia is also highly attractive given our climate, education and healthcare systems and financial stability.

You may ask how do you capitalise on this wave of Chinese investment. While many investment banks are developing SIV compliant managed funds and other products for applicants, and this will be attractive to many seeking a passive wealth diversification strategy, we have found that the entrepreneurial spirit in China is very strong. Many of our new clients are seeking active business interests in Australia. Investment in property development, agriculture and wineries while at the top of many applicants lists is certainly not the be all and end all for many.

We met individuals with a vast array of business interests across a diverse range of sectors who were keen to build relationships in Australia and partner with the right businesses or contribute capital to new business ventures. In this century, the Asian century, the region in which we live will become home to most of the world’s middle class. The Asian region will be the world’s largest producer of goods and services and the largest consumer of them. While Australia has strongly embraced the resources boom and the benefits in recent times we must continue to build strong relationships with China and Asia generally to not only grow economically but to further build on the social and cultural ties in the region.

Don Lee, Luke Malone, Martin Zhao and Gavin Fernando are Directors of Fountainguard Prosperity’s Asian Business Desk team who provide a full range of accounting, financial and wealth management advice to the Chinese market.

 

Fountainguard – Prosperity Advisers joint venture to build inroads to Chinese market

Continued investment to drive future growth of the Asia Business Desk

Leading East Coast chartered accounting and financial advisory firm Prosperity Advisers Group has bolstered its Asia Business desk expertise by partnering with Fountainguard Pty Ltd to increase its advisory capabilities to the Chinese market.

The joint venture enables Prosperity Advisers to grow and consolidate its established expertise providing a full range of accounting, financial and management advisory services with a sharp focus on the Chinese market. Prosperity has 25 years’ experience and has a history of success working with the Asian market facilitating investment between Asia and Australia. As China’s economy continues its growth, the joint venture positions Prosperity to facilitate local participation in that growth.

Martin Zhao and Don Lee, Chinese ex-pats with banking and commercial backgrounds are principals of the joint venture and will bridge a cultural gap ensuring clients receive a seamless experience. Prosperity will lead a six-person team that will visit five key cities in China next month to meet with clients and key influencers and introduce the venture.

Allan McKeown, CEO Prosperity Advisers says, “Prosperity’s growth in its Asia Business desk continues apace and the joint venture with Fountainguard is an important strategic development. Through our global advisory network, Leading Edge Alliance, we have built strong relationships with Chinese clients investing in Australian assets, and helped Australians enter the Asian market. This partnership underscores our commitment to growing our Asia Business Desk and providing a blue-chip service.’’

Martin Zhao says, “The Chinese investment market is notoriously difficult to enter and Don and I were impressed with Prosperity’s success and approach. The partnership between Fountainguard and Prosperity will enable Allan and his team to really build upon their existing relationships and create multiple opportunities for clients; we are excited to be working with a progressive advisory firm to build their capabilities in China.”

“The relationship with Fountainguard is a key differentiator for Prosperity Advisers. While we regularly visit China and have personal relationships with our Leading Edge Alliance partners there, we believe we are amongst the first financial advisers to secure a strategic partnership to directly build a Mandarin-speaking on the ground presence with the Chinese market.

“Our Asian based clients have invested tens of millions of dollars into Australia and will continue to do so in the future. These investments have included property, resources and active businesses. The significant ‘Investor Visa’ market has enormous untapped potential.”

National Commission of Audit: Summary of recommendations

On 1 May 2014 the Federal Government released its National Commission of Audit (NCOA) findings on streamlining the efficiency of government. The comprehensive scope of the report leaves little to the imagination and is expected to form the central blueprint for the 2014 Federal Budget.

The 64 recommendations are summarised below. The recommendations are divided into what I would call “themes” and have been grouped accordingly. Where appropriate a summary has been provided in Italics.

Theme: Approach to government and new fiscal rules (Recommendations 1-6)

These measures are aimed at shaking up the operational management of Government and bringing some of the disciplines to Government that many Australians already apply to the management of their personal financial and business affairs. To a non-economist, some of the measures belie how inefficient some aspects of management in government have become. The reforms proposed signal big potential changes to staffing within the Federal public service.

  • Achieve a surplus of 1 per cent of GDP by 2023-24.
  • Substantially reduce net debt over the next decade.
  • Ensure taxation receipts remain below 24 per cent of GDP.
  • Provide funding to unfunded public service superannuation liabilities.
  • Let the private sector take equity positions to prevent putting taxpayer funds into projects with low return and excessive risk.

Theme: Reforming the Federation (Recommendations 7-11)

These recommendations focus on delivering efficient government at the pavement level, eliminating duplication between layers of government and giving States access to tax income and gain more autonomy in their revenue collection settings.

  • Delivery is delivered by the level of government closest to the people.
  • Minimise duplication between the Commonwealth and the States.
  • Give the States access to the personal income tax base creating a State level income tax (similar to the US) and let them choose their level of tax to encourage competition between the States.
  • Share GST on a per capita basis and make equalisation grants to deal with any inequalities.
  • Replace COAG with the Productivity Commission.

Theme: Retirement system (Recommendations 12 -15)

Recommendations 12 – 13: Age Pension indexation and eligibility

Existing retirees will gradually be affected by a gradual slow down in the rate of increase in indexation of aged pensions, but the key measures are really directed at lifting the ladder on access to government pensions to Gen X, Y and beyond. The inclusion of “valuable” family homes (set below the level of the current Sydney median house price) in means testing will instantly lock many out of the government aged pension and force people in their 40’s to think about liberating value from the family home to fund their retirement. A gradual lift is proposed in the age the people can access their own superannuation savings to 62 by 2027 and ultimately 65. This could actually mean that smart acting middle aged people who have enough will be able to access key contributions concessions for a few more years.

  • Age Pension indexation arrangements to a benchmark of 28% of Average Weekly Earnings over 15 years.
  • Increase the eligibility age for the Age Pension to around 70 by 2053. The proposed change would not affect anyone born before 1965.
  • Replace the current income and assets tests with a single comprehensive means test, which deems income from a greater range of assets from 2027-28.
  • Include in the new means test the value of the principal residence above a relatively high threshold. The threshold in 2027-28 would be equivalent to the indexed value of a residence valued today at $750,000 for coupled pensioners and the indexed value of a residence valued today at $500,000 for a single pensioner.
  • Increasing the income taper rate from 50 per cent to 75 per cent for new recipients from 2027-28 onwards.

Recommendation 14: Superannuation preservation age to 62 by 2027

  • Increasing the superannuation preservation age to five years below the Age Pension age so the preservation age reaches 62 by 2027.

Recommendation 15: Tighten means testing for the Commonwealth Seniors Health Card

Theme: Health care (Recommendations 16 to 19)

The key emphasis is to push people to more of a user pays setting.

Recommendation 16: Slowing the phasing in of the National Disability Insurance Scheme

Recommendation 17: Short to medium-term health care reforms

  • Requiring higher-income earners to take out private health insurance for basic health services in place of Medicare; and precluding them from accessing the private health insurance rebate.
  • Co-payments for all Medicare funded services, underpinned by a new safety net arrangement that would operate once a patient has exceeded 15 visits or services in a year. General patients would pay $15.00 per service up to the safety net threshold and $7.50 per service once the safety net threshold has been exceeded. Concession card holders would pay $5.00 per service up to the safety net threshold and $2.50 per service once the safety net threshold has been exceeded;

Recommendation 18: Come up with a proposal to reform the overall health care (again!)

Recommendation 19: Co-payments under the Pharmaceutical Benefits Scheme

  • For general patients with costs below the safety net, a co-payment increase of $5.00 (increase from $36.90 to $41.90), while above the safety net a rise of $5.00 (from $6.00 to $11.00);
  • In line with the increased co-payment arrangements, the general patient safety net should increase from $1,421.20 to $1,613.77; and
  • For concession card holders, no increase to the current co-payment of $6.00 while below the safety net threshold of $360.00. However, once the safety net limit has been reached, concession card holders will be required to co contribute $2.00 to the cost of their medicines;
  • Opening up the pharmacy sector to competition

Theme: Family benefits

The general message is that middle class welfare in the form of direct hand-outs is being removed. The NCOA believes Government money is better spent on expanding the types of care available through the childcare system at the expense of the Government’s current proposed levels of paid parental leave.

Recommendation 20: Family Tax Benefits

  • Changing arrangements for Family Tax Benefit Part A by introducing a new single means test, with the maximum rate of the benefit paid up to a family adjusted taxable income of $48,837 and then phasing out at 20 cents in the dollar until the payment reaches nil;
  • Abolishing Family Tax Benefit Part B;
  • Introducing a new Family Tax Benefit Part A supplement to be paid to sole parent families who have a child under the age of eight. The supplement should be the same as the current maximum rates of Family Tax Benefit Part B ($4,241 for a family with a child under five, or $3,070 for those whose youngest child is aged five to eight years);
  • Changing the per child rates to be based on the current Family Tax Benefit Part A rates for a first child and paid at 90 per cent of this for second and subsequent children; and
  • Removing the Large Family Supplement and Multiple Birth Allowance recognising that the costs of children are sufficiently covered by the basic rates.

Recommendation 21: Paid Parental Leave

  • Targeting expenditure to those most in need by lowering the Paid Parental Leave wage replacement cap to Average Weekly Earnings (currently $57,460), indexed annually to movements in this wage; and
  • Savings from the lower wage replacement cap be redirected to offset the cost of expanded child care assistance, with the intent of making the changes broadly budget neutral, including retaining the 1.5 per cent levy on company taxable income above $5 million per year.

Recommendation 22: Child care

  • Should include in-home care and other types of care that are not currently subsidised

Theme: School Education

Funding generally is stepped back from the long term “Gonski” levels, but appears positioned to honour short term funding commitments of the Government. It looks like big adjustments are planned to the public service head-count in the Federal Department of Education.

Recommendation 23: Schools funding

  • Policy and funding responsibility for government and non government schools is transferred to the States, with annual funding provided in three separate, non-transferrable pools – one each for government schools; Catholic systemic schools and independent schools.
  • Publish funding and student outcomes on a nationally consistent basis.
  • Base Commonwealth funding from 2018 onwards on 2017 levels with funding indexation based on CPI and average wage price movements.

Theme: Defence (recommendation 24)

Better control of efficiency, effectiveness, accountability and transparency of Defence spending. Big shake-ups in public service organisation and staffing levels.

Theme: Government Care

Introduction of new means testing measures to limit access to Government care and further deregulation of the aged care sector.

Recommendation 25: Aged care

  • Full value of the principal residence in the current aged care means test;
  • Allow access equity in a residence, to pay for part of aged care costs;
  • Introduce a fee for providers to access the accommodation bond guarantee or insure against default of a patient.

Recommendation 26: Carer payments

  • Only one Carer Supplement per carer;
  • Income test for the Carer Allowance, set at $150,000 per year;
  • Reviewing eligibility criteria to encourage the carer to participate in employment;
  • Aligning Carer Payment to Age Pension changes (28% of AWOTE).

Theme: Unemployment benefits (Recommendation 27)

  • Young single people aged 22 to 30 without dependants to relocate to higher employment areas or lose access to benefits after a period of 12 months on benefit
  • Increasing the income test withdrawal (taper) rate to 75 per cent for Newstart recipients and other related allowances.

The minimum wage (Recommendation 28)

  • ‘Minimum Wage Benchmark’, set at 44 per cent of Average Weekly Earnings;
  • Transition over 10 years by indexing at less than; and

Theme: The Disability Support Pension (Recommendation 29)

  • Aligning the Disability Support Pension to the revised benchmarks for the aged pension described above and increasing

Theme: Higher education (Recommendation 30)

  • Students pay more, government pays less (55:45 vs the current 41:59)
  • Deregulation of bachelor degree fees
  • Increasing the interest rate on student HELP debt and increasing repayments

Theme: Foreign aid Recommendation 31

  • Outcomes focused spending with limitation of future growth in the aid spend by requiring business case justification rather than unevaluated indexation

Theme: Industry Assistance

Recommendation 32: Industry assistance

  • Limit assistance to areas of genuine market failure and transitional assistance
  • Eliminating or reducing funding for 22 existing programmes
  • Softening anti-dumping rules so they only apply on a cost/ benefit basis
  • Agenda of labour market reform, deregulation, energy policy and provision of economic infrastructure.

Recommendation 33: Assistance to exporters

Abolish:

  • Export Market Development Grants
  • Tourism industry grants
  • Asian Business Engagement Plan,

Halve funding for Tourism Australia.

Significantly reduce Austrade and restructure Austrade and Tourism and Australia into DFAT.

Recommendation 34: Research and development

Abolish sector-specific research and development programmes;

  • reducing government support for Rural Research and Development Corporations to better reflect the mix of private and public benefits;
  • Streamlining existing grants processes;
  • Better government oversight of CSIRO.

Other recommendations

Recommendation 35: Indigenous programmes – create a PM’s Indigenous Affairs agency and rationalise and consolidate programs

Recommendation 36: External review of resourcing diplomacy and consular activities, fees for consular services

Recommendation 37: Abolish the Farm Finance Concessional Loans Scheme

Recommendation 38: Housing assistance: disband existing afforable housing programs and replace with rent assistance to States that charge market rates of rent

Recommendation 39: Vocational education and training: abolish Federal schemes and drive through the States

Recommendation 40: Mental health – remove duplication between the Commonwealth and the States

Recommendation 41: Natural disaster relief – push to the States and make disaster-specific grants

Recommendation 42: Community Investment Programme – push to the States

Recommendation 43: Visa processing – Outsource

Recommendation 44: Employment services – cust costs oer jobseeker

Recommendation 45: Efficiency of the public broadcasters – better benchmarking of performance of the ABC and SBS

Recommendation 46: Containing costs associated with Illegal Maritime Arrivals

Recommendation 47: Fair Entitlements Guarantee Scheme

  • cap maximum redundancy payment equivalent to 16 weeks’ pay
  • limit the wage base for the scheme to Average Weekly Earnings.

Recommendation 48: Scale back Medical indemnity subsidies

Recommendation 49: Grants programmes – centralise administration and decrease volume

Rationalising and streamlining government bodies

Recommendation 50: Reduce the number of government bodies by 73

Recommendation 51: Consolidation of border protection services

Recommendation 52: Consolidated crime intelligence capability

Recommendation 53: Consolidation of Health bodies

Recommendation 54: Single civilian merits review tribunal

Recommendation 55: A central register and new guidelines for establishing bodies

Recommendation 56: Reduce the number of boards, committees and councils

Improving government through markets and technology

Recommendation 57: Privatisations

Short term

  1. Australian Hearing Services.
  2. Snowy Hydro Limited.
  3. Defence Housing Australia.
  4. ASC Pty Ltd.

Medium term

  1. Australian Postal Corporation.
  2. Moorebank Intermodal Company Limited.
  3. Australian Rail Track Corporation Limited.
  4. Royal Australian Mint.
  5. COMCAR.

Long term

  1. NBN Co Limited.

Recommendation 58: Management of the Commonwealth Estate – adopt commercial property management expertise

Recommendation 59: Professionalise outsourcing, competitive tendering and procurement

Recommendation 60: Outsourcing of the Department of Human Services payments system

Recommendation 61: Data – “get commercial” on big data

Recommendation 62: e-Government – accelerate on-line service delivery

Recommendation 63: Cloud computing – adopt “cloud first” strategy

Recommendation 64: Corporate services and systems – moved to shared services for all departments and agencies.

 

Effective Asset Protection – Control the risks and protect your wealth

“It won’t happen to me”, “It is unlikely I will be sued,” and “I have insurance” are things we as Accountants hear our clients say all the time in our day-to-day activity.  Occasionally these statements are tested when something unexpected happens in someone’s life or business, and sadly, for those without a good approach to risk management, the outcome can be devastating.

Rarely do many of us stop and take a good look at our lives, to recognise changes in our personal and business situation and to take time out of our busy schedules to focus on the protection of our hard earned wealth.  Good risk takers find the time to work with a diligent adviser to oversee and ensure their wealth building plans are not easily undone.

An effective asset protection strategy is about reviewing and understanding the risks and adopting measures to protect family and business assets.

Many people think that lawsuits only apply to high risk occupations such as obstetricians, engineers and professional advisers.   Sadly, this is just not the case.  In fact litigation is becoming quite common and its prevalence continues to increase in Australia.  Quite often, if not carefully examined, you may find your insurance policy does not actually cover what you expected.

Recently I was speaking to a family colleague, his wife was caught in a defamation claim, the home was in her name and unfortunately they did not have an asset protection strategy in place. While it was no fault of her own, they had to settle the claim. With careful planning and implementation of a well designed trust structure including an equity protection solution for their home, they would have had a much greater degree of protection from the legal claim. Not long after, I met with one of our new clients for a preliminary risk review.

Identifying the risks
Our client owns a successful engineering business. As part of our strategic review process we conduct a business and personal risk review which examines each of the items below:

  • We confirmed the engineering business was operating through a hybrid unit trust structure which had been set up years prior. The trust was the ideal structure to run and operate the business. All the business assets were owned by another asset protection trust and therefore adequately protected. The trust deed did however require an upgrade to ensure that it was covered for recent legislative changes.
  • Recently an offer was made to two employees of the business to become equity owners. The problem with the unit holders agreement was the absence of a clear succession plan and in addition to this no funding mechanism to protect the business owners if one decided to sell, retire, was required to leave due to health reasons, disability or traumatic illness; or unexpected death.
  • We confirmed that the key person, skill retention and emergency management plans and policies were in place.
  • We found the family residence with no mortgage, was owned in the clients wife’s name, which provided a reasonable degree of asset protection.
  • Upon inspection of the portfolio of investments (property/ shares/cash), we found all were protected appropriately by insurances and appropriate asset structures except for one property in the husband’s name. All other assets owned either in their family investment trust their superannuation fund.
  • We looked over the couple’s personal insurance cover confirming that the family was adequately covered.  We did however update some of their policies to take advantages of important new features and more favorable clauses offered by other insurance providers.
  • We checked to see that general insurance, health cover, professional indemnity and business insurance was all in place and adequate, finding the only deficiency was that the professional indemnity had not been updated to cover a new area of service the business was operating in.
  • We confirmed they had completed binding nominations for their superannuation and nominations for their insurance in accordance with their estate planning review. We had previously arranged for their wills to include discretionary testamentary trusts which are created upon death. The trusts are designed to protect personal assets for future generations (Children/ Grandchildren) from potential creditors, bankruptcy and/ or due to marriage/ de facto breakdown.

Issues identified 
Key to these issues was the fact that our client had structures and estate planning in place to protect their assets.  We had concerns about the risks of holding the equity in their home in the wife’s name and the property in the husband’s name.  The goal was to remedy this without incurring significant transfer costs of stamp duty on the properties and capital gains tax on the investment property.

Solution
We arranged for an equity protection strategy and implemented the following:

  • Establish a family investment trust controlled by the parents for the benefit of their beneficiaries (children, grandchildren and other family members). The trust structure designed to protect assets from potential creditors, bankruptcy and for future generation from a claim due to marriage/ de facto breakdown.
  • Arrange for legal documents to gift the equity to the family investment trust without incurring tax costs.
  • Implement legal documents, registrations and security documents to take a first mortgage over the properties.

This strategy achieved the same level of asset protection as transferring the properties to a family investment trust without incurring substantial taxation costs. This also gave the couple peace of mind that the assets in personal names are also protected.

We were also keen to put in place a formal unit holders agreement to include the transfer of ownership to the surviving equity owners rather than transfer the ownership to the executor of the estate. This would occur at the time the estate is paid from the insurance policy in the event of death or disablement. The policies also owned by the appropriate structures to ensure tax efficiency.

The overriding thing to remember is that while accidents and incidents might happen in life, significant financial downside risk can be prevented with proper planning.

As a practicing accountant and financial advisor for over 20 years, I have heard of many other unfortunate business lawsuits, family disputes, financial setbacks which with some legitimate and sensible asset protection strategies could have been avoided.