Your Business Assets – Are They Protected?

It is common practice by entrepreneurs to have their trading entity own their business assets and in this way take advantage of the depreciation benefits.

By housing your assets in the same entity which creditors and SARS could potentially have access to, you are unnecessarily exposing them to risk. Should your business fall on bad times and is unable to meet its obligation, its creditors may then attach all business assets owned by the entity. How then do you protect your assets from the potential risk of the trading side of your business? The answer is simple – purchase your assets in a Business Asset Trust. In this way, your assets will not be exposed to the risk associated with the conducting and carrying on of your business.

What many may argue is that by having your assets held by a separate entity, the depreciation benefits are lost resulting in a higher tax obligation. It is correct that you cannot utilise the deprecation benefit in your trading entity, however, your tax obligation should not be any different. No entity would simply allow another entity to utilise its assets without compensation. Same goes for the business asset trust. The business asset trust needs to be compensated by the trading entity for the utilisation of the assets. As a result, a rental agreement is entered into between the trust and the business whereby the business rents the assets from the trust and pays a monthly rental. Your bottom line is then not affected as your expenses are increased by the rental paid.

Having addressed the importance of your business assets being owned by a trust, what now needs to be determined is which trust to utilise. While it is important to keep your structure as simple as possible you cannot ignore the potential risks that may be attached to your business assets. They could be exposed to Landlords, creditors, staff, and vicarious liability to name but a few. Your assets could also be geared, particularly if your business requires large machinery. If you were to have your family trust own your business assets then you would expose your risk free assets to these factors and defeat the object of the family trust. Another important factor, when considering which trust to utilise, is whether or not you have business partners or if there is potential that a new partner may be introduced. Again, if your family trust is the owner thereof, your new business partner would now be a party to your family trust and have access to your personal assets! Furthermore, by having your assets owned by the family trust, you could have a potential tax burden as the trust would be renting the assets to the business, thereby making it a trading trust. Moreover, VAT would also be an issue as you may want to register the trust for VAT and you cannot register your family trust for VAT as there could be further tax consequences as a result.

We would also not suggest that the assets are held by your residence trust for the same reason and any property or business trust for reasons of ring fencing your risk.

It is evident therefore that a separate business asset trust be set up which can be created to incorporate your specific requirements and ring fence your risk.

Should you be starting out it is easy to set up your structure correctly. If, however, you have been trading for some time and have housed your assets in the incorrect entity, the restructuring of same must be effected correctly so as to ensure that you are not exposed to higher tax burdens and you do not contravene the Income Tax Act. It is therefore important that you consult with the correct advisors when implementing same.