Are your partnership and superannuation assets exposed? As we look at step 4 in Becoming Financially Well Organised, we’ll talk a little about partnerships and probably one of the biggest areas of interest for the average Australian investor… Superannuation.
A partnership of individuals is a simple structure established when people either purchase an asset or start up a business together. Most people don’t know that under partnership law, the partners are jointly and severally liable for the debts of the partnership. Jointly and severally means that if the assets of the partnership are insufficient to meet the debts of the partnership, they must be met jointly by the partners. However, this does not mean that they must contribute in accordance with their ownership percentage in the partnership. If one partner has no assets and the other partner has sufficient assets to compensate for the shortfall, that partner may be liable to pay the entire amount. This asset risk is more common than you would think.
A common scenario . . .
Sisters, Karen and Catherine, are in a business partnership together. They also have a silent partner, their father Ken, who also provided the capital to start the business. Karen and Catherine take their share of profits first to compensate them for their wages, with the remainder being split up one-third each. After five years of hard work, the business starts to head south. After selling all the assets of the partnership, there is a net amount of liabilities still owing of $150,000. Karen and Catherine have no other assets, so Ken is left to pay the $150,000. Ken and his wife own a house together worth $500,000, but have retired and have no capacity to earn income and therefore they cannot get a loan. They are forced to sell their home to pay the remaining debts of $150,000 of the business.
Partnerships can comprise of companies and trusts, together with individuals. There can be any combination of these. However the rule of joint and several liability still applies, so if you are contemplating being in a partnership, or you are in a partnership, be aware that you could be held liable for the debts of the partnership.
Assets owned in your superannuation fund are protected from creditors, unless you have significantly changed your pattern of contributions to the fund and shifted larger amounts of assets into the fund to protect them from creditors. A Self Managed Superannuation Fund (link to more info about SMSFs) can provide further protection of assets such as your business premises, however be aware that there are superannuation laws that must be complied with.
Next week will conclude Asset Protection Plans with Loans owing by your entities as well as convenient checklist for you.
To develop an effective Asset Protection Plan, contact FWO on 07 3833 3999 or email firstname.lastname@example.org.