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Asset protection silos are to ringfence the assets of one business from the creditors of another.
Asset Protection Silos
How should you structure a multi-project business for asset protection?
Let’s say you are a builder with several construction projects. Or in hospitality with several restaurants and cafes. Or a retail chain with various locations. Or in agriculture with several enterprises. How should you structure your business so that creditors from one project or site can’t attack another project or take your cash or your tools?
This is the question that Andrew Andreyev of ADLV Law in Sydney and Adelaide will discuss with you in this episode.
Here is what we learned but please listen in as Andrew explains all this much better than we ever could.
To listen while you drive, walk or work, just access the episode through a free podcast app on your mobile phone.
Asset Protection Silos
There are two schools of thought. One side says that entrepreneurs should be able to choose which assets they put at risk. If they are brave enough to venture out, they should have safe harbours for their assets.
The other side says that an entrepreneur should put all their assets at risk. That there should be no asset protection at all for them.
Common Structure
Create a separate entity for each business, usually a separate company for each business, project, and location.
Then you have a finance company that lends funds to the various operating or project entities for security. This finance company is often the holding.
If you have a lot of assets, then create a separate asset company that owns the assets. For example, if you rent out cranes worth of millions of dollars, make sure the cranes sit in a separate asset company.
And then you also have a general service company that lends its workers to the entities and provides accounting and other admin services.
In the past, you often had an HR company that was just about staff. But nowadays it is usually a general service company that goes beyond just staff. With a general service company, you almost certainly will be grouped for payroll tax.
Tax Deduction
To be able to deduct central costs like wages or interest, these expenses need to lead to income. In other words, the finance entity must on-charge the interest, otherwise, its interest expenses are not deductible.
On the same basis, the central HR company needs to on-charge its labour costs since otherwise, their wage expenses are not deductible.
Security
For the asset protection to work the finance company must hold a security interest over the asset.
If the finance company doesn’t hold security for those loans, then the asset protection shoots into the void. So make sure that these intra-group loans have security, usually in the PPSR, often an All PAP or PMSI.
All PAAP
The acronym stands for All Present And After Acquired Property. It covers any property bought after the date of the All PAAP.
All PAAP is for everything that is not covered by a PMSI.
PMSI
A Purchase Money Security Interest is about a specific asset. That asset subject to a PMSI does not fall under an All PAAP.
Naming of Entities
Make sure that the trading entity names are clearly different to the finance or general services company. So that creditors can’t claim that they thought they were dealing with the other company.
Summary
So in summary do the following five things:
1 – Create separate operating entities for each enterprise.
2 – Create separate finance, asset and general services companies. The finance company is often also the holding, whereas asset and general service companies are often sister companies to the operating companies.
3 – Get the finance company to register its interests in the PPSR for an All PAAP or PMSI.
4 – Name trading entities clearly different from the finance and asset company.
5 – Have the agreements properly documented and executed. So have loan agreements and pay interest. Have service agreements and pay for services. So that the setup can’t be called a sham.
But this is just a brief summary on our side. Andrew Andreyev goes into a lot more detail. So please listen to the episode.
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Disclaimer: Tax Talks does not provide financial or tax advice. All information on Tax Talks is of a general nature only and might no longer be up to date or correct. You should seek professional accredited tax and financial advice when considering whether the information is suitable to your or your client’s circumstances.
Last Updated on 04 October 2024
Tax Talks spoke to Andrew Andreyev - Principial at ADLV Law - for more details.
