Bob the Builder Worries About Asset Protection and Seeks a Solution

Discussion in 'Accounting & Tax' started by Mike A, 15th Jan, 2020.

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  1. Mike A

    Mike A Contact 0448 998 132 Business Member

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    Bob's back and he is worried !! He has $1m in cash at the bank in his development company and wants to protect his hard earned cash.

    What can Bob do ?

    Bob's construction business has done really well over the past few years. He has made some great profits and is now sitting on a healthy $1m cash at bank balance.

    Bob is talking with his friend Tony Toberini who he didn't realise has also been doing developments on the side. Tony tells him "Bob has your accountant advised about protecting that cash mate ? What if your development business is sued ? That $1m bucks is up grabs mate"

    Bob goes home worried. What if he lost it all. Would Wendy stick by him ?

    The next day he meets with some advisers who tell Bob that it would be worth trying to protect the cash. "Now Bob if you pay out a dividend at present you are going to have a massive tax liability as you own all the shares" This is a disaster thinks Bob.

    Fortunately Larry the Lawyer helps Bob implement a strategy where he pays no capital gains tax on the rollover and after paying out a dividend (yes Bob a few more tricks there but Larry will assist you) Bob is able to get the cash out and protect his hard earned asset.
     

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  2. Trainee

    Trainee Well-Known Member

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    Would it have been easier to have the development company shares owned by a family trust in the first place?
     
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  3. willair

    willair Well-Known Member Premium Member

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    What happen's if Wendy takes off with Tony Toberini ..
     
  4. Mike A

    Mike A Contact 0448 998 132 Business Member

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    yes that would have helped but @Terry_w and I have seen many cases where a previous accountant has set things up this way initially.
     
  5. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Member

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    Yes slipping in a company in the middle could be a way of avoiding both CGT and stamp duty as the ultimate beneficial owner is still the same.
     
  6. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

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    Depending on many factors a super strategy could be a major consideration. Many tax advisers avoid super as unlicensed financial advice is involved. Super limited recourse strategies with a disc trust and bucket co can compound into a major family intergenerational wealth strategy
     
  7. Mike A

    Mike A Contact 0448 998 132 Business Member

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    i'm really uncertain how superannuation is going to help Bob the Builder with his $1m in cash in his trading entity ?

    this isn't even a bucket company. it's a holding company. and in my example no discretionary trusts involved.

    if it's some other scenario then happy to see your example but this doesn't relate to the original scenario.
     
    Last edited: 16th Jan, 2020
  8. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

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    The absence of a bucket company doesnt vastly assist asset protection however if the bank company lent on a secured basis to a super fund complying with the Commissioners arms length loan policies and also a LRBF this can address many aspects without paying a dividend subject to uplift tax etc or facing Div 7A. The nature of the mortgage may need to ensure that demands for repayment can be averted if a administrator or liquidator were to be the Director. Bobs Bank can then act as a bank and assist family and personal wealth accumulation. Perhaps even Bobs parents too. If they arent working the parents could draw pensions and gift allowances for school fees and more. Strategies galore.

    I would agree that Bob should have considered structure at the time of proceeding with his development intentions. Structure for the dev and for anticipated profit should be addressed early.

    The 122 rollover is just step one I believe. Depends on many factors eg Bobs age etc

    SMSFs are the world second best tax scheme. The best is a tax free nation but thats illegal for aussies.
     
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  9. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Member

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    I think Paul is off on a tangent again.
     
  10. Piston_Broke

    Piston_Broke Well-Known Member

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    That cash is not protected
     
  11. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Member

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    It would be very much protected if the original company is sued. If Bob is sued he still owners the shares in the company so these are at risk and therefore the cash is at risk.

    A cheap and simple way to improve protection I think.
    Legal Tip 250: Holding Companies as Asset Protection Vehicles Legal Tip 250: Holding Companies as Asset Protection Vehicles
     
  12. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

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    Profits and accumulated income are a tax problem. The more the higher tax rate too. Converting that problem into a longer term wealth management solution is practical. And with minimising tax along the way. A company, trust etc can act as a family treasury.

    Its not for all, but people do tend to pay attention when their asset protection is enhanced and they can finance a wealth strategy that accumulates through compounding over time in a sheltered low tax rate environment. Property tick, share tick, development reinvestment tick. If the company lends its accumulated wealth then the earnings are tax sheltered at a low rate. If they are drawn and used then personal tax is often at high marginal rates.

    Its all about strategy.

    I'm close to posting my strategy on the $50,000 concessional contributions cap. No reserves, nothing complex. Just strategy.

    and the death benefits super trust that can save kids 17% tax.
    Or the one about making adult kids a superannuation dependent to turn off that tax too.
     
  13. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Member

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    I don't deny that, but someone will post about X and you will start talking about Y!
     
  14. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

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    I do a lot in self managed & general super. I see super strategies in many tax issues. We get loads of enquiries as a result. Its no different to structuring v loans. Someone wants to buy property means structure advice for owning and even loan arrangements. Maybe related loans etc....Same same.

    Bob may even be interested in a structure that allows his kids school fees to be concessionally a tax benefit... Yeah a SMSF.;)
     
    Last edited: 16th Jan, 2020
  15. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Member

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    lol, See what I mean!
     
  16. Scott No Mates

    Scott No Mates Well-Known Member

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    Oh look! A butterfly..... :rolleyes:
     
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  17. Piston_Broke

    Piston_Broke Well-Known Member

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    Bob The Builder Pty Ltd means that he is most likely director & share holder.
    Not protected.
    If the court case is recent, he obviously is dodging creditors.
    Not protected.
     
  18. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Member

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    He is changing the shareholder to a company. If company A pays a dividend to company B then it is less risky if company A is sued.
     
  19. Piston_Broke

    Piston_Broke Well-Known Member

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    The companies can't exist on there own.
    It has to have share holder/s and director/s.

    And maybe you could argue that Bod the Builder pty ltd is the alter ego of Bob the Builder since he does all the work and is just a sham type setup.

    There are some family court precedents where the term "alter ego" was used to bust trust setups
     
  20. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Member

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    The company is a separate legal person. Separate to its directors and shareholders. There is a long line of cases going back to the 1800s - one major one being Salomon from memory.

    If a company is sue it is a separate legal entity to its directors. Directors can be liable in some cases though.

    There is a possibility the there could be challenges such as a transfer to defeat creditors - but I have never heard of a dividend payment being treated as such.

    Alter ego - never heard of a successful argument based on something like this example. It is clear that even a one man company - one person as director and sole shareholder - is a separate entity - like mr Salomon.

    This strategy would give good asset protection against insolvency of the company, provided there is no insolvent trading - then the holding company could be liable s588v or thereabouts of the Corporations Act