Martin: Welcome to the business owners podcast, where we throw aside taboos and share strategies for growing, protecting and exiting your business. My name is Martin Checketts and I am here with my colleague Ed Skilton and together we represent Mills Oakley’s Private Advisory Team. Welcome Ed.
Ed: Thanks Martin, how are you?
Martin: I am very good and I am very excited to be doing our first ever podcast.
Ed: Likewise. Do you want to talk about why we have put this together?
Martin: Look, absolutely Ed, it is something that I have been excited about for a very long time. We find that in our practice advising business owners that the same issues do tend to reoccur and we have been thinking about a more efficient way to get the message out there, so we are hoping that the podcast serves that function. On a more personal level, as a lawyer I am also becoming more increasingly frustrated by seeing clients exit their business sub optimally, and by that what I mean is that we as the lawyers get involved right at the end of the process. And yes, we can very competently draft and negotiate the sale agreement for them but very regularly, and in fact I would say more often than not, we see a lot of business owners leave value on the table because they haven’t taken some simple steps to maximise and lock in their value along the way. So, if this podcast can help to educate our clients and listeners in relation to those aspects I am hoping that they will get a much better result when it comes time to maximise the value of their blood, sweat and tears.
Ed: And you might even get to be famous.
Martin: (Martin Laughs) Well of course, you know Ed, if that is an incidental benefit I will take that as well (Martin Laughs).
Ed: Yeah, good on you; and of course private businesses are really important to us. We do not have much of a business ourselves if there aren’t people setting up, growing and exiting their businesses and it is also very important to the economy as a whole. You see a lot in the press, especially the Fin Review, about private business owners and family businesses and how much they contribute to the economy in terms of GDP and also in terms of employment figures. So, I think there is a higher purpose to this podcast beyond getting advice out there. It is actually something that I feel strongly the community needs to think about, and hopefully there is some value in this podcast.
Martin: Quite right Ed and you read the stats: 70% of businesses are in private hands. The net wealth of the Baby Boomer population is significantly in excess of Australia’s GDP. There is going to be a massive transition of wealth from the Baby Boomers to the next generation in the coming 5-10 years and if we can help with that I’d certainly get a lot of satisfaction from that. But hey Ed, before we begin I am feeling a little bit nervous, I am worried I have got to say, and the reason is we are going to be putting some really good advice out there on this podcast, we are going to be sharing detailed strategies with our listeners but we are going to be doing it absent advice of their specific circumstances. And, as a conservative lawyer, I am worried about getting sued.
Ed: Yeah, and look with your advice I would be worried too (Martin laughs). But it is important, anybody listening, do please seek specific advice related to your own circumstances before implementing any of the strategies referred to in this podcast.
Martin: Very good. And that is our back beautifully covered. Thank you Mr. Skilton (Ed Laughs). Ok so why don’t you tell everybody about our first series of six Ed.
Ed: Sure, well this first series of six podcasts are focused on asset protection for business owners. Now asset protection might not sound very exciting but this is the foundation for the strategy and our podcasts. The basics you need to get right up front. There is no point building all this wealth in a business if you can lose it in an instant, if when you sell that money is not protected, so that is why we are focusing first on asset protection.
Martin: That is right, and it really is the strategy, this series of six is the basics to get right. From there we are going to move into what I think are sexier areas such as selling your business, and we are going to spend a lot of time on those aspects. So today for episode one we’ve decided to choose a topic that I think will be dear to many of our listeners’ hearts, and this is the thorny old chestnut of how to protect your family home as a business owner. And we as lawyers I must say from time to time, and in my view much too regularly, see business owners come through our office door with a problem; they’re just about to lose the family home and they’re trying to put in place some kind of asset protection strategy to, I mean, let’s say it how it is, “dodge” their creditors. And when we see those kind of people right at that point, it is generally too late, there is very little that we can do to help them. So again, as with many of the lessons that we’ll share with you over this podcast series, it’s about doing things right and doing things early.
Ed: And let’s be clear, we are not talking about “bad” people that lose their homes. We are talking about business owners who take risk, and one of the risks they take is that they employ other people and trust other people to do their jobs. And when those people make mistakes, it is often the business owner who is left with the consequences of those mistakes. And if the house is on the line, that means that business owner’s family losing their home because of somebody else’s mistake. Those are the risks in business. There is a lot of upside, there is potential down side as well. So, we are talking about people who might not have made the mistake themselves, might have had no intention of avoiding creditors in the normal sense, but they’re left with this big problem because the house is totally exposed.
Martin: Absolutely Ed, and to illustrate this dilemma we’ve brought one of our clients into the studio, so welcome Wayne. And now Ed, I think it is fair to say that Wayne is our very favourite client.
Ed: Oh he is; he is not just a millionaire businessman and client of the firm. He is our ideal client and why, because he is rich, he is very rich and successful and what is more important…
Martin: He pays our bills.
Ed: (Ed laughs) That, and he has loads of problems and he worries deeply about these problems Martin, best of all, he can clearly articulate what those problems are.
Ed: Now there is only one thing better than that.
Martin: (Martin Laughs) Go on.
Ed: If he were to take our advice.
Martin: And does he take our advice?
Ed: Most of the time.
Martin: Oh, very good. Well, Wayne, it is no wonder that we love you so much.
Wayne: Well, Ed and Martin, I am really worried. You see my son Cameron works in the business and I really want to look after him, he is my first son and he has worked so hard for me for so many years and I just want to look after him. I want to reward him for all the work that he’s done in the business. I just want to buy him a home, but I am just so worried about it. He is a Director of the company and I‘ve heard that Directors can get sued and who knows what other dodgy stuff that he is up to that I just don’t know about, so I just want to help him buy a home but I don’t want to put that home at risk.
Ed: Ok Wayne, thank you for communicating that. It is a common problem, isn’t it. You want to help out your son but you don’t know how to do this. And maybe some of these risks are not that likely to cause a problem and some of them perhaps are risks that we see more frequently causing problems for people, but why don’t we just deal with the here and now. You are trying to help him buy a house and what are the more likely risks that you are going to face that you want to confront now. Well the obvious problem here Wayne is if your son puts this house in his name it’s exposed to any potential risk. Potential risk would include Family Law risk, creditor issues, or potentially a risk as to whether or not you want your son to be able to sell that house, I think that is a big risk for you. So you’ve got a problem, all of the equity is going to be in his name, it is great in terms of Capital Gains because he will have a main residence exemption on his home, he won’t pay any Capital Gains Tax on the growth when he sells, he won’t have any land tax problems, he might even get a reduction in his Stamp Duty if this is his first home, so that is the obvious thing to put the home in his name, but if he is attacked it’s all exposed to those creditors. There are other ways that we can structure this Wayne, but one of the ways you might not want to think about is the next most obvious person to own the home.
Martin: And who might that be, Mr. Skilton?
Ed: Well, that’s going to be his son, Cameron’s, wife.
Martin: Ah, well there is a teensy weensy little problem with that Ed, and um, Wayne you did disclose to me under client confidentiality something earlier on and I know we are going out to hundreds of business owners but look, I am just going to breach that confidence here and now, you have told me about your concerns about Cameron’s delightful wife Angela.
Wayne: Yeah, Angela. Hmm.
Martin: Yeah, so I know that you are very worried about her, her shopping habits, the amount of time she spends with the local pool man, etc, etc, and it is a common concern that we see with business owners; they want to transition assets to their children, they want to set them up with a home, an investment portfolio, they want to bring them in as owners of the family business, but they’re very concerned about a marital breakdown. So Ed, what good advice have we got for Wayne in relation to that?
Ed: Look Wayne, I hear what you are saying, or have said to Martin. That’s your perspective on this relationship and it would be helpful to speak to Cameron at some point. But I hear you, it is a threat and it is a threat for anyone in the relationship And of course we know the stats, and sometimes as your advisors it is easy for us just to think in terms of the stats; what percentage of relationships are going to end in divorce or the ending of a de facto relationship and the ensuing property settlement. So of course you want to think about this, and there are things we can do. One of the things to think about here Wayne is even if the legal title is to be in the name of your son or your son’s partner it is not necessarily the fact that all of the equity will be in that same person’s name. By way of example, somebody buys a house with a mortgage; they have a relationship breakdown, how much equity is really exposed here? Well it’s only the equity that person has in the house it is not the value of the mortgage because that of course belongs to the bank, that’s not exposed here. You have a family trust Wayne and instead of just giving your son the money to go buy a house, what about lending him money to acquire a house, what about lending the money to his partner to acquire the house? If you want legal title for example, to be in her name, but you want the whole property to be mortgaged to your trust which you control and you protect then you might discuss this in terms of a loan agreement with your son and his partner, this might have interest accruing, it might not, there might be some way of calculating repayment based on growth in the property. There are lots of ways to do this Wayne, but just because it makes sense to have legal title in a person’s name it doesn’t necessarily mean that same person should hold all of the equity.
Martin: Now I really like that Ed, and particularly because she can’t sell it either, can she? Not with a first ranking charge in favour of Wayne over the property.
Ed: Well, I wouldn’t buy it and its going to be pretty hard to register a transfer if there is a mortgage on there.
Martin: Yeah, so bank-like control, which really kind of sucks the equity out of the home, to me that is attractive, I mean, look we would hope that the value of the home would increase over time, so how does that work? Doesn’t that create an extra exposure?
Ed: Look, it does, and sometimes we enter into Option Agreements and we have to be very careful with these from a tax perspective, but sometimes we might grant someone an option to acquire a property at today’s value, for example, if certain events were to happen so we can deal with that. It is fairly complex, but yes I would expect that in the context of negotiating the loan agreement you would also negotiate any options for the trust to acquire that property back if certain things were to happen.
Martin: Very good. So that to me sounds like a “go-to” strategy Mr. Skilton. Home in the name of son or spouse or together, but with a big fat loan from the Family Trust secured by mortgage: giving bank-like control to Wayne.
Ed: And in time Wayne, we should talk about who will ultimately control that loan but let’s just assume for the time being that it is to be controlled by the Trust.
Wayne: Ed and Martin, thank you so much for that advice. That is a huge weight off my mind. Please, send me the bill, that was very very valuable. I have just realised something though, so we’ve talked about protecting this home for Cam and that’s all good, but I have realised that the shares in the business, and it is a good business, I own no shares in my own name, so I guess those shares are exposed. I’ve got a problem there too and I am really worried about it. What can I do about it?
Ed: Wayne, that is such a good point and we really need to deal with that in some detail, so I’ll tell you what, why don’t you come back next time and we will focus on that issue of you personally owning shares in the business.
Martin: So, that’s what was worrying Wayne this week. Ok Ed, so let’s re-cap our key strategies about protecting the family home. So, maybe I will go first with the easy one if you like, so strategy number one is that your family home should not be in your own name if you are a business owner and the reasons for that are obvious of course, business owners get sued all the time and often in their personal capacity because they‘re Directors of companies and Directors have personal duties and responsibilities and because they’ve given guarantees to suppliers, landlords, banks, etcetera, etcetera, so that valuable asset, you’ve got to get that out of your own name.
Ed: Now if the asset happens to already be in your name, which is a different scenario to Wayne’s, the sooner it’s transferred out of the business owners name the better because there is a clawback period, now subject to what is being paid for the transfer of the property, subject to who is receiving the property there are a number of different rules in relation to how far back a creditor can go but let’s just assume you are only in the clear, so to speak, five years after the date of the transfer if you are moving it out of your name into somebody else’s name. So ideally it is purchased in the name of the person that you want the property to be in if the worst ever happened.
Martin: That’s right. And Ed, there is also of course Stamp Duty, I mean that is going to be on top of people’s minds, they’re going to be reluctant, I think, to transfer out a valuable property and wear that Stamp Duty hit.
Ed: That is a really good point, with a family home in a number of States it may not be a concern if it is being transferred to a spouse but often properties are transferred not to spouses but to companies and trusts then Stamp Duty is a major impediment, as would be Capital Gains Tax if it is not the home and there are other strategies that are really too complex to go through today and they deserve their own session, I think, but gift and loan strategies, anyone listening may have heard of this before, where equity is gifted and sometimes borrowed back on commercial terms, those are strategies that we can use if we don’t want to move legal title out of someone’s name but we do want to move the equity, but again that is for another day.
Martin: That’s great Ed, and you make a great point about the transfer to the Spouse for love and affection and again this would be our go-to strategy, wouldn’t it, it would be to get it out of your name, put it in the name of the spouse, assuming that he or she isn’t also exposed to business risk and then if you can lock it up with some kind of loan arrangement, all the better. Ok. Strategy number three.
Ed: Well one of the things that concerns me a lot talking to clients about transferring properties is that we tend to solve the first problem, but not think through what the second, third or fourth problem might be. A common problem is that business owner ensures that home is owned in spouse’s name – it’s not the end of the story because something could happen to the spouse before it happens to the business owner. We see this a lot in peoples plans when we audit them. The spouse owns the house. Their Will, for example, leaves everything to the business owner. All of the asset protection is then undone and I’ve seen scenarios when somebody receives an inheritance right at the time that they are going bankrupt or they have got significant problems and are at risk of bankruptcy, it’s not that hard to protect assets under a Will, it’s really is not that hard, it just requires a bit of planning and a bit of consideration around the tax and asset protection issues but it can be done in the spouse’s Will for example to protect the home for the business owner without negative Stamp Duty, Land Tax and Capital Gains Tax consequences.
Martin: And isn’t that a great example Ed of the multifaceted nature of these problems because this happens all the time, you fix one thing and it creates another problem elsewhere. So yes, without a really rigorous analysis this is what is on first blush a business problem, it’s a problem about protecting assets from creditors. Of course, it flows into a Tax issue and then a Wills and Estate Planning issue. I think that is a great example of that.
Ed: And then flip it around. You ask a lot of business owners, Martin, who will receive all of your wealth if something happened to you; you pass away or you lose capacity or something happens to you, who then will be the Director? Who’s going take over this thing? Who is going to run the business for the time being? It may not be long term, but in this period of time where you are unwell or maybe you have just passed away? Who is going to be the Director? Very often the response is “well I guess it would be my spouse” “I guess it would be my child, my children”; the very people who hold all of the assets, and now the people who have to assume all of the responsibility. Now there are ways of dealing with this, maybe they control the shares in a company and they can appoint a Director, for example, there are ways to deal with this, but there has got to be a plan, there is no point in setting things up for now and not thinking through what are the possible permutations over time.
Martin: I think that is so well said Ed, thank you. So look we hope that you got some value from our canter through strategies for protecting the family home. Next week we are going to extrapolate that concept and what we are going to do is talk about similar strategies to protect the valuable equity in your business, because just as we see often business owners who hold the family home in their own name we also often see them hold the valuable share capital in their companies in their own name and that is just as bad maybe even worse and in fact the business may be far more valuable than their home is, so they really need to get onto that as well and next time we are going to talk about those strategies. So now to conclude our first episode, and I must say it’s with some reluctance I have decided to indulge Ed. (Ed laughs) Ed, I don’t think I can bring myself to introduce this section, I think I am going to have to leave it to you.
Ed: (Ed Laughs) Ok, look the point of this section is sometimes it is a lot easier to hear and understand and think about some of these problems in the context of a story, so I just wanted to introduce some characters that we might journey with over the next five or six sessions and episodes, so that people get to grips with who these people are, maybe identify a little bit with the problems and maybe interpret the solutions that we are talking about through these characters.
Martin: Can I just intervene here, I’ll say it less euphemistically – Ed has invented a soap opera.
Ed: (Ed Laughing) Yes
Martin: For those of you who might have grown up in the UK along the lines of the Archers, a, I think rather Twee business owner based (Ed Laughing) I am losing my way now.
Ed: Just let me do this bit. Or for those who didn’t grow up in the UK like us, maybe it’s a bit of a Neighbours/Home and Away feel for you, that’s OK.
Martin: Yes. But all designed, I hope Ed, to illustrate some hard-core legal, tax and business issues.
Ed: Yeah, I mean, hard-core is my middle name. I’ll tell you, let’s just get into it and you can tell me in the end how amazing you think this is.
Martin: Why don’t you start by telling our listeners the name of your soap opera Ed.
Ed: Good point. The name of the soap opera is the name of the business. Can I tell you about Gino. Gino-
Martin: Isn’t it called “Business and Pleasure”?
Ed: Ah, that was a working title. But you thought it was too suggestive. Didn’t you? (Martin laughs)
Martin: So what have you gone with now?
Ed: “The Moral High Ground”
Martin: “The Moral High Ground”
Ed: It’s the name of the coffee shop in the story.
Martin: That’s the name of your soap opera… “The Moral High Ground”.
Ed: We could just call that a second working title for now. If anyone has any better ideas please send them in.
Martin: Yes. Or indeed-
Ed: If your idea is to scrap it. Anyway, let me get into this, I can see you’re jealous because I’ve got the mike and I can see what’s happening here, you are awkward about the fact that I will be talking for a while.
Martin: Alright, you have two minutes.
Ed: I’ll be quick.
Martin: Go for it.
Ed: Gino (background music plays). He owns the coffee shop business, the Moral High Ground, as I said before, he sells ethically sourced coffee beans, that’s clever. Gino is aged 60 and he’s married to Lena, she’s also aged 60, now this is where it gets a bit complicated and this is why I want to introduce these characters. Gino has got a son David, David is from Gino’s first marriage (so before Lena). David is an adult, he’s 32, married to Annie, and they in turn have two young children, so three generations here. Gino’s also got a daughter named Emily from his first marriage and she’s an adult, she’s 26, and she’s in a de facto relationship with Samantha. Now Martin, Lena and Gino have a child between them, Susan is 18 years old and she’s currently a student.
Martin: Ah, a true blended family, if you will.
Ed: It is a blended family, thank you, and we use that term to describe families where some of the children are not from the present relationship that we are looking at. Gino and Lena have some issues here in terms of Succession and Asset Protection because whilst it might be easy in some families to think about how to look after everybody in the family, it’s not always as easy in a blended family.
Martin: So Ed, I think I have given you your minute and a half (Ed laughing). Where are the legal issues and insights here? I mean it is a lovely story and all but where is this going?
Ed: Well what we are going to be talking about over the next few weeks will be business related issues using this family as an example, one of the issues will be who owns the assets? Like we have been discussing today, so the property for example, the commercial premises, who owns the shares in the business? Gino is 60, at what point is he going to think about succession? He really should have started by now. David works in the business, I am going to come to all of this over the coming weeks; what’s he going to do; what do you do? And anybody listening might get a sense of “maybe that’s a bit like my situation, I’m in the business, I’ve got family: some are working in the business, some are not working in the business, what do we do now about succession?
Martin: And is there going to be an exciting cliff hanger at the end of each segment, assuming it goes any further than the first episode (Ed laughs).
Ed: There will be a cliff hanger…Next week I want to talk about how to get the commercial property into Super and how to transfer the business to David without upsetting everybody.
Martin: Ah, well that sounds interesting. But you’re holding out on us aren’t you. That’s next time.
Ed: (Ed laughs) Tune in next week.
Martin: (Martin laughs) Oh boy. Well look, this concludes our first episode, if anybody out there has any feedback, positive or negative and particularly might I say about the “Moral High Ground” Soap Opera we would really love to hear your comments and we can certainly provide some of that feedback next time. We’ve enjoyed it, we hope that you have all got something out of it and we look forward to speaking with you next time.