Structuring for Succession - Who owns what?
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The document discusses structuring assets for succession and asset protection. It provides an overview of different business structures like sole trader, partnership, company, trusts and SMSFs. Each structure has advantages and disadvantages in terms of taxes, asset protection, control and succession planning. Setting up the right structure depends on balancing tax implications with adequate asset protection. Common structures include discretionary trusts which offer excellent asset protection and flexibility in distributions.
Structuring for Succession - Who owns what?
- 2. Asset Protection Structuring for Succession - Who owns what?
- 3. Intro Date Topic Feb 8, 2018 Why Succession Planning? Market research and trends and The Psychology of Succession Mar 8, 2018 Business Valuation Tips and Traps Apr 12, 2018 Structuring for Succession – Who owns what? May 10, 2018 Small Business CGT Concessions Jun 14, 2018 Family Business Succession Jul 12, 2018 Maximising Value – What are buyers worried about? Aug 9, 2018 ESOP as a Succession Option Sep 13, 2018 Strategic Sales – What are buyers attracted to? Oct 11, 2018 M&A Process – Tips and Traps Nov 8, 2018 Action Plan – How to help your clients and attract new clients Succession Masterclass Series
- 4. Craig West CEO & Founder B. Bus (Mgmt.), M. Bus (Acct/Fin), M. Tax Law, CPA Craig’s practice Succession Plus is the largest Business Succession and Exit Planning firm in Australia and provides mentoring, advice and strategy for clients looking to prepare their business for a successful exit. In March 2014, Craig was appointed Executive Chairman of the SME Association of Australia, an organisation focused on improving the success of SMEs in Australia. In October 2014, he was awarded the Exit Planner of the Year at the Exit Planning Institute Annual Conference in Texas, USA as a result of his innovative development of an exit planning process to help business owners maximise business value and achieve a successful exit. During 2015, Craig commenced a Doctor of Business Administration on the topic of using Employee Share Ownership Plans (ESOPs) as a Business Succession and Exit Planning tool. Craig’s proprietary structure - a Peak Performance Trust - has won the Australia-wide award for the Employee Share Ownership Plan of the Year twice in four years.
- 5. Donald Poole started his career in 1974, starting at a suburban accounting practice. In 1980, he opened a small office in Mooloolaba on the Sunshine Coast. The business expanded rapidly and in 1983 and 2007, the firm moved premises to cater for its growth. Don’s personal business, The Poole Group, now has 7 partners, 38 technical and 10 support staff and handles Taxation, Accounting, Audit, Business Management, SMSF and Investment and Insurance Advisory Services. Don has assisted countless business owners through a successful exit, with his client base representing a broad section of industry types and sizes. Scott Patterson has extensive business and professional experience, including over 20 years as a principal of a highly successful public accounting and financial planning firm. His passion is working with clients to improve the value of their businesses, and create a more certain future for them, their stakeholders and their families. Scott utilises strategic thinking, tailored advice and integrated solutions to enable business owners the freedom of determining the time frame and method in which they exit from their business, often their most valuable asset. His expertise stretches across all areas of small to medium enterprises (SME), including agricultural enterprises.B. Bus (Acct), FCPA, GAICD B. Bus, CPA, CTA Succession Plus Partners
- 6. Succession Plus Accredited Advisers We currently have 24 accredited advisers in most capital cities and several regional areas/country towns who have been through our training and accreditation program, and we are still actively recruiting new advisers in many areas. Please visit our page for more information: https://services.successionplus.com.au/accredited-advisers- recruitment/
- 7. Succession Plus’s Proprietary 21-Step Business Succession & Exit Planning Model
- 8. Asset Protection Asset Protection is a means of using business practices and structures to create barriers between your assets and the risks faced by your business or yourself. It’s part of an insurance strategy to make sure that everything you build is protected.
- 9. Asset Protection “Money is like an arm or leg – use it or lose it.” Henry Ford
- 10. Why would I need an asset protection strategy? Asset Protection
- 11. Who is at risk and what are we protecting ourselves against? • Business owners • Company directors • Professionals (i.e. lawyers, accountants, consultants) • Property owners and investors • High profile and public figures
- 12. Sources of potential risk: • Employees • Consumers • Public • Clients • Partners • Creditors
- 13. What is the most effective form of asset protection? A few examples: • Ensuring sound business practices • Keeping up to date with ongoing professional development • Setting up quality control systems
- 14. When is the right time to start thinking about an asset protection strategy? Asset Protection
- 15. 6 simple STEPS to asset protection: Step One - Own nothing Step Two - Quarantine your assets Step Three - Identify appropriate structures Step Four - Create the ideal structure Step Five - Insurance Step Six - Legal protections
- 16. Step One: Own nothing “When I go into any business deal, my chief thoughts are on how I’m going to save myself if things go wrong.” J Paul Getty
- 17. Step One: Own nothing steMove the ownership away from ‘at risk’ organisations and individuals so that if there were to be a legal action from creditors or predators, there is either nothing or very little to be gained. A person or organisation that doesn’t own any assets has nothing at risk.
- 18. Step One: Own nothing Example: Say you purchase a $1 million home, unemcumbered. You don’t owe anything on the house, which is a great feeling and a fantastic achievement, buy you have a $1 million asset fully exposed. If you were to be sued, the house could be sold to release your equity and that money can be taken away from you – so potentially you lose your home and your $1 million. With no debt, this asset is entirely ‘up for grabs.’
- 19. Step One: Own nothing Example: An effective alternative would be to buy your home with a very large mortgage against it, say $900,000. In this scenario, you only have $100,000 equity in the home, which means only $100,000 exposed to any potential legal action against you – and the costs involved in trying to get at your $100,000 are likely to make a lawsuit not worthwhile. By releasing your $900,000 equity you can then use it to invest in other assets through structures that make those investments for your benefit, but not in your name. BANK Mortgage
- 20. Step One: Own nothing Assets are not necessarily limited to cash, shares and property – your assets might also include a business database, proprietary software or other intellectual property that is equally valuable and worthy of protection.
- 21. Step Two: Quarantine your assets “Becoming wealthy is like playing Monopoly… the person who can accumulate the most assets wins the game.” Noel Whittaker
- 22. Step Two: Quarantine your assets Quarantining your assets is about isolating them from risks by creating ownership structures that make people and organisations that are not exposed to risk, the legal owners of the assets. ASSETS RISKS
- 23. Step Three: Identify appropriate structures “Structure is more important than content.” Abbie Hoffman
- 24. Step Three: Identify appropriate structures Business structures are the means through which you can achieve the objectives of asset protection.
- 25. Step Three: Identify appropriate structures Sole Trader Structure Business structure is easy to understand, easy to establish and inexpensive to administer. Many tradespeople and home-based business people operate as sole traders. With a sole trader structure, the individual and the business are ‘the same entity’, therefore this structure offers no asset protection.
- 26. Step Three: Identify appropriate structures Sole Trader Structure Advantages Disadvantages Easy to understand Income is assessed at individual’s marginal tax rate (a disadvantage if tax is high) Quick to establish No income splitting allowed Inexpensive to administer Income from positively geared assets is taxed at individual’s marginal tax rate Individual has complete control and ownership Offers no asset protection, so the individual’s personal assets are at risk Income is assessed at individual’s marginal tax rate (an advantage if tax rate is low) Assets can be negatively geared Can access 50 per cent CGT discount
- 27. Partnership Structure When two individuals are in partnership, it simply duplicates the problems of a sole trader structure – partnerships offer no more protection, and now there are two people ‘at risk’ and two sets of assets ‘up for grabs’. Depending on how they are structured, and what is specified within the partnership agreement, partnerships can offer limited asset protection. Step Three: Identify appropriate structures
- 28. Step Three: Identify appropriate structures Partnership Structure Advantages Disadvantages Easy to understand Income is assessed at individual’s marginal tax rate (a disadvantage if tax is high) Quick to establish No income splitting allowed outside of the partnership Inexpensive to administer Income from positively geared assets is taxed at individual’s marginal tax rate Income is assessed at individual’s marginal tax rate (an advantage if tax rate is low) Offers limited asset protection if the partners are operating a business. If one partner is a company, a proportion of income can be assessed at the company tax rate of 30 per cent Income splitting can be used between two partners Where the partners are individuals (as opposed to companies), assets can be negatively geared Where the partners are individuals, they can access the 50 per cent CGT discount.
- 29. Company Structure Most commonly used of all business structures. They are most costly to establish and are regulated by the Corporations Act and ASIC. The most significant difference between a company and the previous two structures is that a company is recognised as a separate legal entity – in this case you are not your company. An individual may be a director of a company, but the individual and the company are separate entities which does offer some protection. Step Three: Identify appropriate structures
- 30. Step Three: Identify appropriate structures Company Structure Advantages Disadvantages Regulated by the Corporations Act and ASIC Costly to establish, administer and maintain A company is a separate legal entity (it is not you) In order to return income to shareholders, tax may be payable at up to 48.5 per cent Profits can be retained within the company and taxed at the flat company tax rate of 30 per cent Cannot distribute tax losses to individuals Shareholders can benefit from income splitting and tax refunds for access franking credits Cannot access CGT discount. Companies use various ways to direct dividends to shareholders at lower marginal tax rates XYZ Pty Ltd
- 31. Trust (unit trust, discretionary trust, hybrid trust) Probably the least understood but most effective structure is the trust. According to the ATO, nearly two million people in Australia receive distributions from a trust, but because they are so misunderstood, many people, including those who are beneficiaries of trusts, don’t know how to use them to their maximum benefit and advantage. Step Three: Identify appropriate structures
- 32. Corporate Trustee (Pty Ltd Company) The Smith Family Trust How do trusts work? Concept is simple. Essentially, you entrust someone to look after something on your behalf for the benefit of another. In every trust, there is: • A grantor • A trustee • A beneficiary • An appointor • A trust deed Step Three: Identify appropriate structures An example of a simple trust structure Director of Corporate Trustee Beneficiaries
- 33. Unit Trusts Sometimes called ‘fixed trusts’ because your entitlement to income and capital from the trust is fixed by the amount you invest. For example, if you buy 1000 units in the trust you can only earn 1000 units worth of income, or 1000 units worth of capital from your investment, and unless you buy more units that won’t change. This type of trust is often seen on the stock exchange and used by managed funds. Step Three: Identify appropriate structures
- 34. Step Three: Identify appropriate structures Unit Trust Structure Advantages Disadvantages Trust does not pay tax on income but all income must be distributed to individuals (and is then assessed at individual’s marginal tax rate – an advantage if tax rate is low) Costly to establish, administer and maintain Individuals can access 50 per cent CGT discount Cannot retain income or capital gains within the trust Individuals’ investment can be negatively geared Income is assessed at individual’s marginal tax rate (a disadvantage if tax rate is low) Can apportion a fixed percentage of ownership held by individuals based on the number of units held. Income can only be distributed based on the number of units held by individuals No income splitting allowed Trust cannot access CGT discounts Trust’s tax losses cannot be apportioned to individuals Offers no asset protection as units are held in individuals’ names
- 35. Discretionary Trusts Commonly called ‘family trusts’, and as the name suggests, there is a lot of discretion in how these trusts are managed and in the distribution of income and capital. Discretionary trusts are ideal vehicles for succession planning within families because control of the trust can pass from one generation to the next without triggering a CGT liability or incurring stamp duty. Discretionary trusts offer a range of attractive benefits. Step Three: Identify appropriate structures
- 36. Step Three: Identify appropriate structures Discretionary Trust Structure Advantages Disadvantages Trust does not pay tax on income but all income must be distributed to individuals (and is then assessed at individuals’ marginal tax rate – an advantage if tax rate is low) More costly to establish, administer and maintain than unit trusts Individuals can access 50 per cent CGT discount Cannot retain income or capital gains within the trust Trustee has absolute discretion in how income and gains are distributed, so can be apportioned to lower income earners for income and capital gains tax advantages Trust cannot access CGT discount Offers excellent asset protection because assets are owned by the trust, not by individual beneficiaries Trust’s tax losses cannot be apportioned to individuals Excellent for succession planning because control of the trust can be passed from one generation to the next Individuals cannot negatively gear
- 37. Hybrid Trusts This type is simply a cross between a unit trust and a discretionary trust. It is generally the most flexible of all the structures because it enables individuals to gain the tax advantages from negatively gearing investments (like a unit trust does) while retaining the advantages of being able to use the trust to purchase income-producing assets (like a discretionary trust does). On a day-to-day basis, a hybrid trust works in much the same way as a discretionary trust when it comes to earning income, paying bills and owning assets. Step Three: Identify appropriate structures
- 38. Step Three: Identify appropriate structures Hybrid Trust Structure Advantages Disadvantages Combines unit trust and discretionary trust in one structure More costly to establish, administer and maintain than unit trust or discretionary trusts Trust does not pay tax on income but all income must be distributed to individuals More complicated to administer than other trusts Individuals can access 50 per cent CGT discount Cannot retain income or capital gains within the trust Allows some beneficiaries to receive fixed income entitlements while others receive discretionary distributions Trust cannot access CGT discount Can minimise income and capital gains tax by apportioning income to individuals on lower marginal tax rates Trust’s tax losses cannot be apportioned to individuals Can negatively gear investments Offers excellent asset protection because assets are owned by the trust, not by individual beneficiaries Excellent for succession planning because control of the trust can be passed from one generation to the next
- 39. Self-Managed Superannuation Funds (SMSFs) Often called ‘DIY Super Funds’, and although not many people realise it, SMSF is just another type of trust. SMSFs are audited by the ATO and APRA. They are subject to heavy regulation and legislative requirements which specifically prescribe what you can and cannot do within the fund. SMSFs offer excellent tax benefits and phenomenal asset protection. Step Three: Identify appropriate structures
- 40. Step Three: Identify appropriate structures SMSF Structure Advantages Disadvantages Pays just 15 per cent income tax, and no further tax is payable by the members of the fund on retirement Costly to establish, administer and maintain Can take advantage of franking credits by investing in fully franked shares Management of fund is heavily monitored and regulated by the Australian Tax Office, APRA and other legislation Pays on 10 per cent CGT Severe penalties for non-compliance in the administration of the fund Excellent asset protection. As SMSFs are intended to provide for people’s retirement, they are afforded a higher level of protection under the law. No income splitting allowed among non-members of the fund Cannot negatively gear, because cannot borrow money to invest Cannot benefit beneficiaries other than in their retirement
- 41. Your asset protection must be balanced with a consideration of the tax implications. If you structure solely for asset protection without considering tax, you’ll end up paying more tax than you need to and likewise, if you structure solely for tax benefits, you won’t end up with the asset protection that you need. Asset Protection vs Tax
- 42. • Sole Trader or Partnership Income tax = individual marginal rates up to 48.5 per cent CGT = discounted to 50% of marginal tax rate for assets owned for more than twelve months. • Company Flat rate = 30 per cent tax on all income and capital gains Structures and Tax
- 43. • Trusts Not taxable, but all income and profits must be distributed to beneficiaries who pay tax at their individual marginal rate or at the flat company rate if the beneficiary is a company. • SMSFs Income tax = 15 percent CGT = discounted to 10 per cent for assets owned for more than 12 months Structures and Tax
- 44. There are many choices and trade-offs that you will have to make in order to achieve the appropriate balance for your structure and these should be considered with expert advice from specialists.
- 45. Step Four: Create the ideal structure “Before anything else, getting ready is the secret of success.” Henry Ford
- 46. Step Four: Create the ideal structure Discretionary Trust 1 (Shareholder of Smith Engineering Pty Ltd) Beneficiaries CEO of Smith Engineering Pty Ltd Smith Engineering Pty Ltd (Trading Entity) ‘AT RISK’ AREA Corporate Trustee 1 (Pty Ltd Company) The Ideal Structure For Business Director of Corporate Trustee
- 47. Step Four: Create the ideal structure Discretionary Trust 2 Beneficiaries Investments Corporate Trustee 2 (Pty Ltd Company) The Ideal Structure For Investing Director of Corporate Trustee
- 48. Step Four: Create the ideal structure Self-Managed Superannuation Funds Beneficiaries Investments Corporate Trustee 3 (Pty Ltd Company) Self-Managed Superannuation Funds Director of Corporate Trustee
- 49. The end result is an optimal structure for asset protection The Ideal Structure for Business Self-Managed Superannuation Funds The Ideal Structure for Investing
- 50. Step Five: Insurance “Risk comes from not knowing what you’re doing.” Warren Buffett
- 51. Having adequate amounts of the right type of insurance is an essential element of asset protection. While much of the work in the structural side of the process is about quarantining assets so that they cannot be accessed, there is also much that can be done to protect your business, investments and family through insurances. Step Five: Insurance
- 52. Step Six: Legal protections “Law is king of all.” Henry Alford
- 53. The final step in the process is to ensure that you have legal protections that work in conjunction with the rest of your asset protection strategy. Without documents that support the objectives of your strategy, all of your structural tactics can be undermined. Step Six: Legal protections
- 54. Wills A will enables you to plan for the succession of your assets after your death, and it is essential that your will is carefully crafted to support and continue your asset protection strategy. Step Six: Legal protections
- 55. Testamentary Trusts A testamentary trust can be created under a will to take effect upon the grantor’s death. Under this arrangement, the trust takes ownership of the assets for the benefit of beneficiaries as specified within the will. Step Six: Legal protections
- 56. Financial agreements between spouses There is a very common financial risk within families themselves that can be mitigated by having financial agreements in place between spouses. These give people the opportunity to discuss their financial affairs and future when they are thinking positively and can reduce much of the stress, uncertainty and unnecessary costs in the future. Step Six: Legal protections
- 57. Benefits of financial agreements between spouses • Protection for people who wish to secure assets they have accumulated prior to marriage, or assets they may inherit during marriage • Protection for people entering into a second marriage with assets and children from the previous marriage • Protection for third parties who are financially involved with one spouse. • Transactions made in accordance with a financial agreement are protected if a person becomes bankrupt under Section 123(6) of the Bankruptcy Act 1966 Step Six: Legal protections
- 58. Where to from here? “The beginning is the most important part of the work.” Plato
- 59. The asset protection assessment process involves a comprehensive fact finding audit which will identify what you own, how you are currently structured and a plan to take you from where you are today, to the ideal structure for your business. Once established, this structure can be provided to your own accountants or lawyers to manage on your behalf. Asset Protection – Where to from here?
- 60. The process begins with a thorough understanding of your current business and investment structure, which is obtained through a questionnaire such as the Structuring Profile Questionnaire over the next few pages. Asset Protection – Where to from here?
- 67. Conclusion
- 68. Accredited Adviser Recruitment We are actively looking to recruit in the following areas throughout Australia. Visit our website successionplus.com.au or email cwest@successionplus.com to find out more about this offer. NSW • Armidale • Bathurst • Bowral-Mittagong • Coffs Harbour • Dubbo • Goulburn • Hills District • North Shore • Orange • Port Macqaurie • Tamworth • Wollongong WA • Bunbury • Busselton TAS • Hobart • Launceston NT • Darwin VIC • Albury • Ballarat • Bendigo • Geelong • Melbourne • Mildura • Mooroopna • Shepparton • Wentworth • Wodonga QLD • Brisbane • Bundaberg • Cairns • Mackay • Rockhampton • South Gold Coast • Sunshine Coast • Toowoomba • Townsville SA • Adelaide
- 70. Don’t miss these upcoming webinars… Register thru https://services.successionplus.com.au/events/ Date Topic May 10, 2018 Small Business CGT Concessions Jun 14, 2018 Family Business Succession Jul 12, 2018 Maximising Value – What are buyers worried about? Aug 9, 2018 ESOP as a Succession Option Sep 13, 2018 Strategic Sales – What are buyers attracted to? Oct 11, 2018 M&A Process – Tips and Traps Nov 8, 2018 Action Plan – How to help your clients and attract new clients
- 71. Questions…
- 72. p 1300 665 473 e cwest@successionplus.com.au w successionplus.com.au Head Office Level 3, 50 York Street Sydney NSW 2000 facebook.com/SuccessionPlus/ twitter.com/SuccessionPlus linkedin.com/company/successionplus