Beware using asset protection as ‘get out of jail card’

Where clients aim to justify a particular strategy on the basis of asset protection, accountants must assess whether this is genuinely the case, Cooper Grace Ward Lawyers cautions.

Partner Fletch Heinemann said this is particularly critical where there is a risk that the ATO could look to apply Part IVA to the arrangement.

“The words ‘asset protection’ have been used as a bit of a buzzword and almost like a get out of jail free card. [There’s this idea] that you just hand your asset protection ticket to the ATO auditors and suddenly you’ve got a reason that doesn’t involve getting a tax benefit,” said Mr Heinemann.

“There was a GST case which was an anti-avoidance case. There was this massive margin scheme uplift in the tens of millions of dollars and one of the advisers from the big four firms got up on the stand and said it was for asset protection. They just kept repeating that it was for asset protection and it was as though the more they said it, the less credible it got.

“There was no asset protection involved in the structure at all. It was just being used as jargon.”

Accountants should be aware that the ATO will be looking to see that the risk to the client’s assets “is real and not fanciful”, he said.

Working through steps or tests to assess this risk is therefore critical. Mr Heinemann said his firm has previously dealt with ATO audits involving dividend access shares, for example, where the ATO was able to be convinced that it had been done for the sole or dominant purpose of protecting assets.

“In one case, the client had been sued for a couple of million dollars so in terms of convincing an ATO officer that he was at risk, it was strong evidence that the steps that had been taken weren’t on the tax side,” he said.

The first question that needs to be addressed is whether the assets are actually at risk. “If they’re a sole director or a director and a shareholder, then potentially they’re at risk. If they’re a professional adviser, they’re almost certainly going to be at risk,” said Mr Heinemann.

“So, for example, if they were operating an engineering firm and they’re the lead engineer and he gives the advice that the building will not fall over and the building does fall over, then they’re going to be liable for that. If they’re contracted through the company, then the company will be liable for it and they will personally be liable for it as the engineer that did the work.”

If they’re a shareholder just passively holding shares, however, the claim that those assets are at risk may not be legitimate.

For companies that operate in a foreign jurisdiction, it’s best to get advice on what the risks are in that foreign jurisdiction.

“Get advice in the foreign jurisdiction from a firm that says ‘these are your business risks’ and you can then make a decision based on that,” he said.

The next question that should be considered is whether the change or strategy being implemented will actually achieve asset protection.

“In the case Tupicoff v FCT, Mr Tupicoff sold insurance and he decided he was going to run his business through a company. He incorporated this new entity, he was the sole director and still had an interest in the house in his own name,” said Mr Heinemann.

“He wasn’t the sole shareholder and he and his wife were able to split the income from the company. He said that he was doing it that was to make it look more credible and for asset protection. The Judge questioned how he was achieving any asset protection in circumstances where he was the one who was out there selling the insurance. If he made a negligent misstatement, he was the one that was going to get sued for that.

“It couldn’t be objectively viewed for the purpose of asset protection.”

This was quite a different set of circumstances from the case of FCT v Mochkin.

“What happened in this case was that Rabbi Mochkin was a stockbroker and he got sued in his own name. He then set up a new firm and when he set up a new firm with a company, he had employees, he refused to personally guarantee anything and he was hyper alert to his own asset protection position,” said Mr Heinemann.

“The Full Federal Court in that case said ‘look, this is a clear case where somebody has taken steps to protect their assets, not just in relation to the corporate structuring, but in other parts of their life’.”

This is another way to test whether the client is genuinely doing something for asset protection.

“If the client says that they’re doing something for asset protection but then has $10 million worth of assets in their own name that they’re happy to have exposed, then potentially we’ve got a disconnect between what they’re saying and they’re actually doing.”