Legal Tip 250: Holding Companies as Asset Protection Vehicles

Discussion in 'Legal Issues' started by Terry_w, 12th Nov, 2019.

Join Australia's most dynamic and respected property investment community
  1. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

    Joined:
    18th Jun, 2015
    Posts:
    35,801
    Location:
    Australia wide
    Legal Tip 250: Holding Companies as Asset Protection Vehicles


    Many people want to keep money in a company where it will be taxed at 30% or 27.5% and draw out a small wage so keep their overall tax down. The trouble with keeping money in a trading company is that it is at risk if the trading company is sued. Where a dividend is paid to an individual it will get the money out of the company and away from the risk associated with the company, but it will result in tax being payable.


    If the shares of the trading company are held by a discretionary trust, income of the company can be paid out to the shareholders as a dividend and then out to beneficiaries – which could be a bucket company.


    An alternative is to have a holding company in between the trading company and the trust. The shares of the trading company could be owned by the holding company and the shares of the holding company owned by the trustee of a discretionary trust or individual etc.


    Example

    Homer operates Mr Plough Pty Ltd and he thinks it will take off so had has Plougher Pty Ltd hold the shares of Mr Plough Pty Ltd. Mr Plough makes $300,000 profits in the first year. Homer takes a $80,000 wage out of this leaving $220,000 profit. Had Homer left this in Mr Plough the next year if Homer accidentally caused some damage and Mr Plough was sued, the whole $220,000 could be lost.

    But luckily Mr Plough has paid a dividend to Plougher Pty Ltd and has no retained earnings. The following year Mr Plough causes $1mil damage when a staff member drives down a narrow lane and scapes 50 expensive cars – they insurance won’t cover because of a technicality.



    Mr Plough Pty Ltd is sued and goes under, but its only assets are $2. The $220,000 is safely tucked away in a different company.

    Note that this can still be attacked, but it is very much more safer than it was before.



    Add to this over a couple of years Plougher Pty Ltd could be lending money to Mr Plough Pty Ltd for operating expenses, or even lending money to Homer, under a complying Div7A loan agreement, to invest etc.
     
    Piston_Broke, craigc and thydzik like this.