Pathology leasing laws

HEALTH & LIFE’S BEST PRACTICE NEWS ALERT CURRENT CIRCULATION: DATE: ISSUE NO:

7023 31st May 2007 145

Welcome to Health & Life’s free email newsletter service. Tell a friend that we would be happy to add their email address to the distribution list. This service is to provide Health and Life’s clients and those who attended our presentations with up to date information on key financial and practice management issues that may affect your practice. Please do not use this as a substitute to seeking professional advice.

Writer in charge: Mr David Dahm BA.Acc, CPA, FTIA, Ffin, FAAPM, GLFG.

Your Family Trust Assets Are No Longer Safe?

Problem – New Laws Expose Your Family Trust Assets to Litigation?

The tax and asset protection benefits of using a family trust have been in place since the last century. We are concerned that a recent Court case has set a new precedent which exposes family trust assets to medical and commercial litigation.

Our opinion was published in last weeks national Business Review Weekly (BRW) 2430 May 2007 which we have attached for your convenience called “Falling faith in family trusts”.

Family trusts are the most popular vehicle for legitimately minimizing your tax and until recently the best way to protect your assets such as shares, property, investments and practice service trusts, other than super (which can be inconvenient as it lock you funds away until your retirement).

In this is issue we cover this unprecedented problem, the types of unanticipated risks you need to be aware of and what you can do to mitigate and/or avoid this situation.

Specific and simple practical solutions were not published in the BRW article, however we have detailed them in this edition for you.

This issue is a critical one if you are an at risk person and have accumulated a lot of assets in your family trust or planning to do so as it will affect your estate planning such as the preparation of wills, practice and individual structures.

Please note we do not condone or encourage the unethical hiding of assets, however we believe should a vexatious claim arise one should not loose one’s life savings.

In this issue:

1. Problem – New Laws Expose Your Family Trust Assets to Litigation?

2. What types of commercial risks leave you exposed?

3. How to reduce or avoid this risk?

Your Family Trust Assets Are No Longer Safe?

1. Problem – New Laws Expose Your Family Trust Assets to Litigation?

For your convenience we have attached the Business Review Weekly article published on 24th May 2007 that details the Court case and how being an appointor of your family trust can give control to a company liquidator.

In simple terms a Director of a company who is successfully sued can provide a liquidator/receiver under the corporations law access to a individual directors family trust if the individual is also the appointor of the family trust. The appointor of a family trust controls who is trustee and the trustee determines how the assets of a trust are distributed. This case makes it clear that control over the trust assets can be handed over to a liquidator/receiver because they can replace the individual appointor.

2. What types of commercial risks leave you exposed?

The following are just some of the commercial risks a Director or a practice or any company may fix. These are common issues we come across.

1. Australian Consumer and Competition - Fee fixing and Market Rigging After Hours or Hospital Services (especially in rural areas) 2. New Pathology and Radiology kickback Rules – Referrers charging excessive rents 3. Directors vicarious liability for staff, employee and contractor doctor mistakes 4. Medical and Commercial Litigation Insurance Gaps – these arise from loop holes, exemptions and exclusion clauses. Examples include where non-accredited doctors perform procedures. Partnership arrangements and complex legal structures that have not been properly insured and detailed in insurance policies and non medical claims as detailed in this list that are not covered by traditional insurance products.

5. Insolvent trading – Where remaining doctors are being forced to buy out doctors retiring/deceased estates where the practice has high long term property lease and

financial obligations or if you have been bought out by a corporate and you are in breach or contract.

6. Tax Debts – Claims made by the Tax Office for inappropriate service trust structures and/or non-compliance with payroll tax or general tax obligations.

3. How to reduce or avoid the new laws applying to you?

The key opportunity for litigators is to attack anyone who is a Director of a company or a corporate trustee of a trust (like a service trust) where those activities are considered risky. In turn this means if you are a Director of an at risk company you do expose yourself and your family trust to this new law. By becoming or even “acting” like a director, such as a practice manager, this can become an issue. We detail these issues below.

3.1 Avoid Directorships (where possible) Avoid all company directorships unless it is absolutely necessary on medical practice companies, corporate trustees in relation to service trusts or any companies where there is a significant commercial risk that is involved.

This is the simplest approach, but we do find some people often unnecessarily add their name for kudos and/or control purposes - some examples include practice spouses and practice managers.

The first thing you should do is ask yourself is it really necessary, and if not resign immediately. The only real reason is if a bank lends money to the entity and this is a lending requirement.

3.2 Avoid Using Company Structures (where possible) Avoid using company structures for engaging in at risk activities where possible where it requires you to become a director.

3.3 Avoid shadow directorships (the sleeping giant) The corporation laws specifically and can unknowingly rope innocent spouses or managers of a business even though they are not formally notified as directors to the Australian Investment Securities Commission.

Section 9 of the Corporations Act specifically provides that the term ‘director’ includes not only a person who is properly appointed to the position of director but also a ‘defacto’ or ‘shadow’ director.

A ‘shadow’ director means a person in accordance with whose instructions or wishes the directors of a company are accustomed to act.

The test for being a director is related to the function you perform, not your designation.

Types of Directors include: Defacto director – a person who acts as a director even though he has not been formally appointed Shadow director – a person who stands behind an appointed director and gives him/her instructions which are usually followed

Accordingly your behaviour may imply you are a director of the business. Spouses and managers for example should not appear on bank accounts, management meeting minutes and be seen to be taking and making decisions on their own without consultation from the directors and owners of the business.

The issue of shadow directorships is a news alert article in itself. Those of you who have attended our seminars or our forthcoming seminars know there are simple steps you can take.

Spouses should avoid being seen “running” the practice. Spouses are the easiest targets for liquidators. It is generally assumed assets or the control of assets via trusts resides with a spouse.

3.4 Review your family trust deed and revise your will If you use a corporate appointor as a solution as suggested in our article make sure you review your family trust deed so in the event of your death or incapacity a natural person will have control of your estate. A statement of “last instructions” should be prepared by your solicitor which provides instructions to the trust on how the assets are to be divided up amongst your family members or the beneficiaries of the trust. The trust must be empowered to receive these instructions which is why your trust deed needs to be reviewed. Otherwise your last instructions will have no legal effect.

The effect of these changes will mean effectively no real person controls your trust unless you die or become incapacitated which is an ideal position.

Without taking these steps the trust can exist in perpetuity with nobody in control of the trust. This is like a runaway car without a driver.

Make sure the at risks individuals for example a husband and a wife or even one’s relatives are not appointors of the family trust as well.

Replace the individual appointor(s) with a corporate appointor. The shares in the corporate appointor should be held by your family trust. You must ensure the wording of the trust deed permits this arrangement. There may be a requirement for you to amend your trust deed to allow this. It is critical you seek professional advice for this. If done incorrectly a Deed variation may constitute a resettlement and significant capital gains tax and stamp duty consequences may arise if any significant assets are owned by the trust. This is avoidable.

4. Where to from here?

Contact your adviser for further assistance.

Consult your adviser or call us on 1800 077 222 for a brief no obligation, no charge consult if you are not sure. The changes may sound complicated but are not if structured correctly. There will always be some minor risk with these strategies however we have also found there are some beneficial taxation advantages that exist which should outweigh the cost involved.

Remember we say the process is not like building a Bentley, but it is like building a house - one is a luxury and the other is a necessity.

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