Martin: Welcome to the Business Owners Podcast, where we throw aside taboos and share strategies for growing, protecting and exiting your business. My name’s Martin Checketts and I am here with my colleague Ed Skilton and together we represent Mills Oakley’s Private Advisory Team. Welcome Ed.
Ed: Thank you Martin and thank you listeners for coming back after the first episode. It is great to be back here sharing some ideas and strategies with you and as we said last week we both feel passionately about getting information into the hands of you, the business owners. We feel strongly that the business owners play a very significant part in this economy and they are very important to us in our own business and our advice business, so we hope that this information is useful to you and valuable to you as you seek to build wealth in your own businesses. And Martin, how are you?
Martin: I am very good I can’t believe we’ve made it to episode two (Ed laughs).
Ed: I know, doubling our exposure.
Martin: That’s right they haven’t taken us off the air just yet (Ed laughs); notwithstanding your rubbish soap opera “the Moral High Ground”.
Ed: No, I got some good feedback from that actually.
Martin: You didn’t.
Ed: Yeah I did, and on the discussion on the ownership of the family home.
Martin: Really? Well I am delighted to hear that.
Ed: Yeah, couple of emails. But we will get to that in a minute.
Martin: Oh, very good. And look, before we get into the meat of it, I do need to get something off my chest. I mentioned last time how concerned I am about the liability associated with putting this advice out over the airwaves, so if you will indulge me for a second, I’d just like to say that this podcast contains general commentary only and is not a substitute for independent professional advice. Always seek specific advice related to your circumstances before looking to implement any of the strategies referred to in this podcast. Phew! (Martin Laughs)
Ed: Oh my gosh, I can relax. Ok. Now, email came in; Gina from Perth. “Thank you for the tip” she says. That was nice!
Martin: Oh, There we go!
Ed: She says she has been stressing out about the ownership of the family home and now she can have “a sleep at night solution”. She says she can’t wait for our advice about control of family trusts, she is currently working her way across Australia’s top law firms and will get to us eventually.
Martin: Oh Gina, come on down. I am practically shaking with excitement. That will be straight to the top of the client list, there is no doubt about that. And hey Ed, similarly, I received an email about last week’s show.
Ed: Oh yeah.
Martin: This one came from Clive from the Gold Coast, and Clive said “Wonderful podcast, I will be transferring all of my legal work to Mills Oakley with immediate effect. Do your family home strategies also work with a coal mine”?
Martin: And the answer Clive is – Yes, they do. Absolutely and we would love to have that discussion with you. Alright, well to recap from last week, we are kicking off this podcast with a series of six episodes about Asset Protection. We really see Asset Protection Strategy as being the bedrock strategy for business owners. If they can get these basics right to protect what they’ve built through their blood, sweat and tears over many, many years, then they have a very solid platform from which to grow and ultimately exit for a lot of money and certainly we are very, very excited about working with our clients on these kinds of strategies and we find that it gives them so much peace of mind. So, Asset Protection is very much the bedrock. Last week, we talked about protecting the family home. But this week, we are going to take it up a notch. Ed, why don’t you tell our listeners what we have in store.
Ed: Well today’s episode will be about how to protect other business assets and investments held in one’s personal name. So, as per Clive’s question “do the same strategies apply?” well, yeah, in some ways they do; to shares in the company, for example, the trading company that is producing profit and there is some capital growth, somebody personally owns those shares, don’t want to personally own those shares anymore, what do we do about transferring the shares out of their name. We are going to talk about those strategies and we are going to try and articulate some of the things that can be done and some of the tax outcomes as a consequence of transferring shares.
Martin: And Ed, before we get into the detail, this is such a common problem, isn’t it. I mean –
Ed: It is, it is –
Martin: What would you kind of guestimate, think about your client base, how many would hold the shares in their company, probably their most valuable asset, in their own name, what percentage?
Ed: Ah, just sort of a rough finger in the wind, I reckon maybe twenty per cent of the successful businesses and it would be a much higher per cent of the new businesses, people who are just starting out, starting to grow some wealth.
Martin: Oh absolutely, and I can see how it happens because it is very quick and simple to set up a proprietary company for eight hundred bucks and pop the shares in your own name or your wife’s name.
Martin: But, of course, that comes with a big problem.
Ed: It does.
Martin: Because as a business owner you are exposed to a truck load of liabilities from Directors’ duties to OH&S to personal liability under guarantees and the like, all of these kind of claims can attack a business owner and then what a bonanza for the creditor, they find that his most valuable asset, his share capital in his company, is owned by him personally. So, it is fully exposed, and we see that far too often in our practice.
Ed: We do, and it is a problem because, as you say, it is easy to set up a business that way and a lot of people when setting up a business don’t have a lot of money and they don’t want to spend money on some great strategy until the business is actually producing any profit. But, once the business is profitable, then the question is how to invest in the business, whether there is going to be some borrowing, maybe some outside investment, maybe just re-investment out of profits. At some point the question has to be asked, well, is this the right structure? If somebody asked that question very often the answer would be well if you don’t like this structure and you want to change it, there will be some tax consequences, do you want to talk about that, and often people don’t want to talk about that, they rather just keep going. So today, bear with us, we are going to talk a little bit about restructuring a company but we are not going to go into too much detail, we are just going to talk about some of the big issues.
Martin: Thanks Ed, and I think that’s a really kind of good way to put this conundrum, it’s how much do you invest upfront, particularly in a complex structure, when you haven’t yet proven up your business model and you don’t have revenues or profitability. It is a real conundrum, and it is one that our clients face every day. Or, at the other end of the scale, how much do you spend to unwind these kind of problems, and what is the value compared to the risk that you are facing? So hey, as a perfect illustration of these kind of issues we have welcomed back to the studio our favourite client Wayne. Welcome Wayne!
Ed: Wayne, how are you?
Wayne: Good thanks.
Martin: So hey Wayne, last week, I thought we gave you some ripper advice about how to protect the family home and in particular how to help your son to buy a family home in a way that protected him both from external creditors, but also from the possibility of a marital breakdown. So, we hope you found that very useful. But this week you have a different problem, so let’s hear about that.
Wayne: Well, Ed and Martin, I have been stewing on this all week. You helped me out with the family home for Cameron, my son. You helped protect that, so it wouldn’t be exposed to creditor claims or claims by his wife. But I suddenly realised that I hold the shares in my company and it is really a great business, it’s going so well, I hold those shares in my own name. So, the penny just dropped for me, if I get sued, what if somebody sues me for all I am worth, my company that I set up twenty years ago? I have put my blood, sweat and tears into it, I am at risk and I am really worried about it. Ed, Martin, I am just hoping you can help me.
Ed: As we were saying before Wayne, this is a common problem for people, we understand how this has come about, but my understanding, Wayne, is that you might actually want these shares to be not in your personal name, but in fact, in your family trust.
Martin: Yeah, and that is really a “go to” strategy, isn’t it Ed, it is to not hold them in the personal name, but instead hold them in a family trust, in other words a discretionary trust that’s for the benefit for you and your family. And hey Ed, for those of our listeners who might not be so au fait with structures, could you just tell us what a family trust is and what are the benefits of holding equity in a trust versus in a personal name?
Ed: Sure, and yeah, let’s not make any assumptions about whether anyone listening to this has got a family trust or a discretionary trust, or understands these structures. Without wanting to get too overly complex in relation to this, if you imagined you owned the shares, you’ve got legal title, you’ve got your name on the shares, registered with ASIC and you are entitled to all of the benefit, so there is two issues here, there is legal title or control and then there is benefit, or an interest in the shares and their value. When you own the shares its you, you own them, you control them, you get the benefit of them. In a trust structure it is slightly different, what we are really talking about is separating out who gets the benefit from who has control, the controlling roles in a trust can be quite complex and we will talk about that in another episode. But imagine there is someone or some company that controls the trust and a number of people who can benefit from the wealth in the trust, so when the company produces some profits instead of having to distribute all of the profits to the individual owner, in a trust structure the profits can be distributed to any number of potential beneficiaries under the terms of the trust document. With a trust there will be, for example, a Deed, which sets out the rules, a bank account for the trust and a tax file number for the trust, as distinct from an individual who just has the shares in their personal name and who just has their own tax return and their own taxation treatment for whatever the profits are that are distributed to them.
Martin: Hey Ed, I can imagine some of our listeners are thinking “wow, you know that sounds a bit complex, why would I do that?” What are the benefits of holding your shares in that family trust versus your own name?
Ed: There are three main benefits: one, wherever there is complexity there is a need for legal advice! (Martin laughs) Benefit number one.
Martin: That’s a sensational benefit.
Ed: Closely followed up by asset protection, if someone doesn’t want wealth in their personal name because they are worried about asset protection issues such as creditors, family breakdown, the person that you want to benefit not being the most appropriate person to control and make decisions about assets generally, asset protection in that broad sense, control and benefit, that’s one reason to use a family trust, a discretionary trust where you look at who controls and how can they make decisions, take it out of a personal name and away from the risk, like creditors for example. Then there is tax, sometimes in a business where there are distributions through to the owner, the owner will sit here and say gosh, I’ve got all this profit, or I have made all these capital gains on sale, I am getting taxed, I have got such a high tax rate and all of this money that I am making, I wish there was something I could do about that. Well in a family trust, the business owner may be in control and they may distribute profits through to themselves, but they could also distribute profits to other people or in a company on a much lower tax rate, so often one of the key benefits of a trust is the taxation outcome from the distribution of profits.
Martin: That’s great Ed. So really, it’s asset protection, you don’t hold it in your own name, so if you are sued, you know, with some caveats, the assets are protected and it’s much, much better, tax effective ability to distribute to family members and perhaps a corporate beneficiary. Thank you. So what we all need to do as business owners is get those shares out of our own and name and we need to get them into a family trust. But Ed, there is a teensy little problem with that isn’t there, and particularly if you have a very big and vibrant business that you have grown up from nothing.
Ed: Look, there really is, as a lot of business owners will know, capital gains tax was introduced in the 80’s. There is a tax on the gains made on those shares, so as the business has increased in value the shares are worth more. When the shares are sold, when the business is sold, there is a capital gains tax event, tax has got to be paid at that point. So, if we were to transfer those shares to a trust, even if the trust isn’t going to pay full market value, that is a capital gains tax event, tax is due even though the business owner still controls the trust.
Martin: Yes, and so you have got at that point an unfunded tax liability and who wants that? So this is the dilemma that Wayne has and he really has to, I think, assess the benefits of the restructure, the tax and asset protection benefits as against the cost, both in terms of the professional costs of doing this and also the tax liability. And that’s often a really, really useful process for business owners to go through, and sometimes it is a no-brainer because the cost is so much smaller than the benefit and all of the wonderful good stuff that flows from that restructure. Sometimes it is not, and it is great to make an informed decision. But in considering these aspects there’s one particular part of the tax laws that we find is often overlooked, and that’s the benefit of the small business tax concessions, which are some very generous concessions that people are often very focused on when they sell their business to a third party, but they tend to forget that they can also access these concessions on an internal restructure, such as the type that we are thinking about for Wayne. So Ed, what would Wayne need to do, or what would his business need to look like, in order for him to restructure tax effectively and pay minimal or no CGT using the small business tax concessions?
Ed: Well the test that most people try to apply is the net assets test, it’s a six million dollar test, essentially what we are trying to do is to demonstrate that if this business and the business owner’s net assets, not including their house and some other assets, do not total more than six million dollars, then we access these concessions which will very often reduce the tax bill down to next to nothing, if not zero. These are really powerful concessions, and there are loads of hoops to jump through and it is sort of a major tax advice piece, but if the total assets are worth less than six million we would expect Wayne to be able to access these concessions and reduce the tax bill down to zero or near to zero, the other benefit here is that if he sells the business in the future and he is above the six million dollar cap, then only the growth since the restructure of the business is going to be taxed. So for example, hypothetically Wayne owns nothing but the business, the business is worth five million, he transfers into the trust, he accesses a whole bunch of these concessions, he doesn’t pay any tax, few years later the business is worth seven million and he sells. What’s going to be taxed? Only the two million dollar gain. It’s really, really powerful.
Ed: It is a bit of a by-product, it is a really powerful by-product, getting taxed on two million instead of seven million. Now Wayne is actually over six million, he failed that test. But there is another test, it’s not the assets test necessarily, but the turnover test, his turnover is less than two million dollars a year, therefore he can still access these concessions, even though he has got more than six million dollars in assets.
Martin: Wow. And what we are talking about now, I would hasten to add, we are really now into the territory of advanced strategies, this is complex and as Ed said there are a bunch of boxes to tick and hurdles to jump before accessing these valuable concessions. But if you can get it right it really can be the icing on the cake in that you can achieve all of your goals in relation to asset protection or you may want to bring other owners into the business and do it at the same time. There could be a bunch of really good reasons to restructure and if it can be done in a way that is tax beneficial it really can be a wonderful outcome for business owners. So brief summary: if you have got a reason to restructure, you’ve got an asset protection concern, for example, and if you think that you might be able to access those concessions it is definitely worth a chat with your adviser and to explore that in a bit more depth.
Wayne: Thank you so much for that Ed and Martin that really helps me. It does sound complicated, but if I get all of those benefits and if I can protect this company that I have spent my life building up, that sounds like something this is really worth looking into. So, maybe I will have a chat with my accountant and we can both come in together and we can talk about it some more.
Martin: So that’s what was worrying Wayne this week.
Ed: And a few more insights just to pick up on here that weren’t really appropriate to discuss with Wayne. Turnover can fluctuate. We have to be really careful as to what the turnover is at any point in time and what it has been in the last few years, we know that when we bring people into the business it is going to change the turnover. If suddenly we start to ramp things up, if someone goes out of protecting phase into growth phase again, that turnover is going to change very, very quickly and sometimes there are factors outside of our control here so we need to pick the time right. It is worth looking at this sooner rather than later. We’ve got the same clawback problems that we have with the home. If we are transferring assets we have got to wait a number of years before that’s safe from creditors, so again another good reason to look at it early on and in some States Stamp Duty may be an issue as well. Different States, different rules, don’t get me started on that but it is something that your adviser should look at when transferring assets, including shares in a company, sometimes Stamp Duty is an issue.
Martin: That’s a brilliant point Ed and it is often overlooked isn’t it, people can get very excited about the benign CGT treatment of a restructure but then depending on where the assets are located, and it wouldn’t have to just be land it could be other business assets, they can get a very nasty surprise.
Ed: Yeah, and that is one of the reasons why we have set our team up the way we have. Different people with different expertise that can look at this from different angles before the advice is finalised. It is something that is really important to do and to collaborate between advisers; legal, accounting, financial, all the advisers collaborating to get the right answers.
Martin: That was a fantastic promotion Ed for which I thank you. (Ed laughs) But it is absolutely something that we believe in. You can’t do these strategies just with a lawyer. You can’t do these strategies just with an accountant or just with a financial planner. You need all of the skills in the room and particularly the financial, the legal and the tax, very much go hand in hand. Ok, well, it’s that time again Ed.
Ed: Yes. “Business and Pleasure”,
Martin: Oh, I thought you called it “The Moral High Ground”
Ed: No, I got some emails, people like “Business and Pleasure”.
Martin: Oh, we are back on “Business and Pleasure” are we? This is, for any of you who have missed our inaugural episode, this is Ed’s rather fanciful business related radio soap opera. Ed you might describe it for such listeners as we may have remaining. (Ed Laughs)
Ed: Let me just recap on the characters and you will remember from the cliff hanger from last week was how to get the commercial premises into Superannuation and I will get to that, but let’s just recap on the characters. There is Gino the business owner, he owns the coffee shop named “The Moral High Ground” which sells ethically sourced coffee, it’s clever. He is aged 60 and he is married to Lena, who is also aged 60, Lena is Gino’s second wife and Gino has got two kids from his previous marriage, David, who is aged 32 and married to Annie. They have two young kids of their own, and Emily who is aged 26 and she is in a de facto relationship with Samantha and then the third child Susan who is the child of both Lena and Gino, she is aged 18 and is a student. Now –
Martin: Hey Ed, and I am sorry to interrupt but I feel that I have to. Maybe again could just kind of articulate the premise of this, you know, why, why do you think our target market for this podcast, you know business owners who are in their 50s, 60s and 70s, why are they interested in listening to this kind of light and fluffy radio soap opera.
Ed: (Ed Laughs) Look, because whilst some people want hard facts, some of us learn in hard facts where we sit, read and talk about the numbers –
Martin: Yes please, that sounds nice! (Ed and Martin laugh)
Ed: Maybe you can relate to that description, other people, you might call it “fluffy”, other people prefer to learn through stories and are more interested in the personal situations of people and how to apply these concepts to the personal situations. They might be able to relate to one or more characters here, for example they might relate to Gino or Lena or one of the children working in the business, as David works in the business and his sisters do not. You know, and I am not trying to be stereotypical or sexist here, it just happens that David works in the business. One of the problems here is that there is a blended family and Gino, and we will get to this later, might not know exactly to whom he wishes to leave the benefit if he were to pass away or if something where to happen to him. Given that David is working in the business he is probably under-paid; he probably thinks he’s ready to manage this business now, aged 32. We are talking about a transition of control, not just management but also equity. Now to get to the point-
Martin: And are you going to act this out, are you going to do the voices? For example.
Ed: Well I am in costume!
Martin: And thank goodness our listeners can’t see your delightful outfit.
Ed: Yeah, today I am dressed as Gino who is a snazzy dresser, wears a suit and tie.
Martin: And I am dressed as Lena. No, no I am not! Get that image out of your mind.
Ed: Let’s leave all those attempts of jokes out of this, it’s unacceptable in today’s society to make these sorts of jokes. Now, let me get to the point.
Martin: Yes please, that would be lovely.
Ed: I’ve been trying to get to the point for a while. The business premises is owned in Gino’s name, now we have spoken over the last two episodes, the “why” this is not necessarily a good idea, but this is how it was. Gino purchased the commercial property in his name. He has got a self-managed Superannuation Fund and like a lot of business owners he has been talking to friends about what to do in retirement, how to maximise income and capital gains in retirement. He has heard that when he retires and he is receiving an income from his self-managed Superannuation Fund, that’s going to be tax free income and tax free capital gains.
Martin: Wow, now this is sounding attractive Ed, talk to us about that.
Ed: Well one of the drivers that we see in our own client base for starting to think about retirement is this idea of, well I could retire and I could still receive an income on the property even if my children or my child took over the business and were taking the profits from the business. I could still receive the income on the property. There would be a lease in place between the business and the landlord and if that landlord is the self-managed Superannuation Fund all of that rent is going to be tax free income. So Gino wants to get his property into his Superfund, but there are issues. Firstly, how much can you get into Super? Secondly, what happens when you sell? Now we have spoken a bit about Stamp Duty, and transferring a property to another entity, but actually if you transfer a commercial property to a self-managed Superfund you might find that you can get that in there free of Stamp Duty, so that is a starting point.
Ed: But, we can’t necessarily contribute all of the value of the property, can we? Because it’s worth more than the maximum amount that Gino can contribute in any given year. Now other things to think about and I don’t want to sort of bog us down in detail. Maybe he contributes some for Lena, maybe the Superfund borrows to buy the whole property off him and pays a bit of Stamp Duty on the amount that he has to buy; the rest is contributed by Gino. Maybe he contributes this property over a number years and in fact he can bring forward three years’ worth of contributions in one go, to get as much in as possible in the shortest possible space of time. Once the property is in there, free income, so want to get it in as quickly as possible.
Martin: And thank you for all of that Ed, just at a really high level, and I would stress this is just general advice, you know, how much can he get into Super, you know, if the property is worth one million can he get it in or not, just give us a feel for –
Ed: You can get about half of that in straight away.
Martin: About five hundred in, straight away?
Ed: Straight away. You might be able to get close to six fifty in, depending on the timing. He might put a bid in just before 30 June, and then three years’ worth, 1 July. So you can get four years in there in one go.
Martin: Wow, so for a suburban coffee house owner, such as the owner of the “Moral High Ground” or whatever you’ve called it, he might get the whole thing straight into super right?
Ed: He might, now-
Martin: That sounds like a very attractive strategy.
Ed: It is extremely attractive. Remember that one of the reasons he wants it in there is that if he ever sells it, it’s Capital Gains Tax free. So what does that mean now, transferring it in, Capital Gains Tax. However, as we have discussed with Wayne, he may be able to access Small Business Concessions now because he is under the six million dollar cap.
Martin: So he can get the small business concessions on the “property” and not just the “business”?
Martin: Very good, and that is an “active” asset, yeah?
Ed: Exactly, now again, lots of hoops to jump through, but just as a concept, something for you to explore, you might be able to get this property in free of Capital Gains Tax, mostly free of Stamp Duty and once it’s in Super, that income is going to be free of tax as well in his retirement, and free of Capital Gains if he ever sells it within Super.
Martin: That’s great Ed, and it’s always hard isn’t it to kind of get the balance between giving some very detailed advice but also kind of keeping it simple and understandable, but to me, and maybe I am more simple than you Mr Skilton. (Martin laughs)
Ed: You are a very complex individual,
Martin: Don’t comment on that (Martin laughs), but, yeah it seems to me just to be a great strategy for all of the reasons that you have articulated. Particularly if you are looking to sell or maybe transition the business but keep an asset and lock in an income stream, and with all of the tax benefits that would go with it as you move into retirement. I think it is a ripper strategy.
Ed: I’ll go this far and say if you personally own the business premises, go and get some advice immediately about whether you can transfer the premises into your self-managed Superfund.
Martin: Yeah, absolutely, and really that’s a good idea, whether or not you have got a broader exit strategy happening right now.
Ed: Yep, that is right because the tax on the income is, and the Capital Gain, is likely to be lower even before retirement if it is in the self-managed Superfund.
Martin: That’s great Ed, thank you, I must say you have almost converted me to the soap opera, (Ed Laughs) Although, I was pleased a bit was more kind of techno than you know fluff and buff around Gino’s feelings or what have you. So, I thank you for that. (Ed and Martin laugh) What have we got next time?
Ed: Oh, you want a cliff hanger?
Martin: Oh, yes please, well I am hoping that would work well.
Ed: Well, next episode, I want to talk about control of the fund. Who should control this Superfund once it goes in, because it is a type of trust.
Martin: So for example, is it going to be Gino, is it going to be Lena, is it going to be the kids? Those kinds of things, the ups and downs.
Ed: Yep that’s it. Who should be involved.
Martin: Very good, well hopefully that sparked a bit of interest and a bit of anticipation for people to tune in next time. Well hey, thanks everybody again for listening, we do hope that you got some value out of it. If anybody has got any questions or comments, you are very, very welcome to contact us via the website or to email us direct. I am email@example.com and Ed is firstname.lastname@example.org, so you can choose who you send that to, either or both, and we will very much look forward to you tuning in next time, thank you.