Most Australians insure their home, contents and vehicle, with good reason, but for most people in business, there are greater risks that are often left exposed:
- The ability to earn an income – there is unlikely to be a more valuable asset in a person’s life than their ability to work and yet, life, trauma and income protection insurances are often neglected;
- Marriage break-down – it will never happen to me … but statistically, the odds are poor and if it happens, fire, flood and theft are the least of your concerns;
- Insolvency – unfortunately, this can happen to even the most prudent business person: a GFC, overseas labour or imports, new competitors, new taxes, a big client going into liquidation, etc.; and if it does happen it affects more than a single asset or a split of marital assets. It is 100%, less the bare essentials (a basic wage, car, furniture and trade tools).
This firm does not sell insurance; nor do we try to provide tax or accounting advice; we do not provide family law services; however, we know good people who do these things, and they can all be important elements in an asset protection plan. We provide the overall strategy: designing and creating structures (corporations, family trusts, unit trusts, etc.) to create asset havens; risk identification and mitigation (e.g. planning against director personal liabilities); asset security advice (mortgages, charges, security registration); and guidance in times of financial crisis (insolvency advisory).
Asset-holding entity / Trading entity
The purpose of this short article is to provide an update and warning about a very popular, and usually effective, asset protection strategy: separating the asset-holding entity from the risk-taking trading entity, while giving the trading entity access to the valuable and essential assets (e.g. vehicles, plant and machinery or intellectual property in a franchise or software company) informally, or through a lease, licence or bailment arrangement.
This has been a favourite (and effective) accountants’ strategy for decades. If the trading entity suffers misfortune, and becomes insolvent, the most valuable and essential assets are preserved in the asset-holding entity. It is much easier to start again; lawful “phoenix” activity.
Personal Property Securities Register – PPS Leases
However, in January 2012, the Personal Property Securities Register came online and changed the rules. This popular strategy to separate asset ownership from the trading entity may fail if not on the Register. Business owners with these structures should promptly seek advice.
The law introducing this register, the Personal Property Securities Act 2009 (PPSA), creates a legal concept new to Australia called the “PPS Lease”. As you might expect, the “PPS Lease” concept includes a lease, however, it also often includes a licence, bailment, hire-purchase, consignment or retention of title arrangement. Basically, the new concept covers most occasions when the asset (tangible or intangible) is in the possession of another.
If the trading entity has possession of the assets for more than 12 months (or 90 days for assets that may or must have a serial number, e.g. vehicles), and the true ownership is not registered as a security interest on the Register, then receivers or liquidators and some other registered secured creditors (e.g. financiers to the trading entity with broad-based security – fixed and floating charges in the pre-PPSA terminology) can often ignore the true legal ownership, and seize and sell the assets.
Register the true ownership as a PPS Lease or else, possession can become “10/10ths” of the law.