Why the Right Accounting Advice Matters

Pilot Partners recently hosted an event with HopgoodGanim Lawyers and Perpetual for the inaugural “Advice for Women” evening at Calexico.  The event commenced with a panel discussion based around the following scenario.

Scenario

Helen is in her 50s and considering retirement and legacy planning with her husband, Mark. They have two adult children. James, their son, is a stable salaried executive and Sophie, their daughter, is a passionate entrepreneur who co-owns a business with a long-time friend.

Helen wants to ensure both children are supported, that Sophie is protected in her business and personal life, and that her own financial independence and legacy are secure regardless of what life throws her way (illness, death, divorce, business breakdown).

So, what advice would an accountant give to help Helen?

The Role of an Accountant in Retirement and Legacy Planning

Helen is not alone in her concerns about wealth transfer. According to McCrindle, over the next 20 years, approximately $3.5 trillion of wealth will be passed between from the Baby Boomers to the next generation.

An accountant’s role in this transfer goes far beyond “doing the tax.” In situations like Helen and Mark’s, the right accountant can:

• Design a retirement plan that is tax-effective and tailored to your goals; ensuring not only that you have security, but that your children are protected from unnecessary financial risk.
• Work collaboratively with your lawyer and financial advisor; retirement and inter-generational wealth planning is rarely solved in isolation. A team approach is essential to cover legal, financial, and taxation aspects.
• Structure wealth for both tax efficiency and protection; minimising tax on the transfer of assets while also safeguarding those assets for the next generation.
• Navigate increasing regulatory scrutiny – with the Australian Taxation Office’s (ATO) advanced data matching and audit programs, it is critical that your accountant is experienced and technically sound.

The Question of Structures

There is no “cookie cutter” approach to a group structure and they matter not just for tax purposes, but also for asset protection. Family trusts (whether discretionary, bloodline, hybrid, fixed), companies, and other vehicles each have their own advantages and limitations. A good accountant will take the time to understand your personal circumstances and recommend a mix of structures; often blending different options to achieve the right outcome.

The entities in your group structure should fit the purpose you need them for and isolate the risk associated with them.

Special Considerations for Sophie, the Entrepreneur

Owning a business brings reward, but also risk. For Sophie, there are extra layers of planning to think about:

• Shareholder or Unitholder Agreements – setting clear rules for business relationships, exit terms, and succession planning. You write these agreements when you have a strong relationship with your business partner as it’s a catalyst for a conversation. The agreement should be drafted with input from both a lawyer and an accountant. It’s also important to keep any valuation clauses and formulae up to date to reflect the current industry conditions.
• Insurance – business and key person insurance can protect Sophie’s business in adverse circumstances and ensure her stake is properly valued and covered in the event of death or disability.
• Personal Asset Protection – entrepreneurs often focus heavily on the business and overlook their personal balance sheet. Correct structuring ensures personal wealth isn’t put at risk alongside the business.

Lessons From a Forensic Accountant’s Desk

Most clients who require a Forensic Accountant’s services need to know what they’re fighting about and the best way to break it up. Three recurring themes we see in these matters are:

1. Group structures that don’t make any sense – Often we encounter group structures which appear to have no clear purpose behind them, have another entity just “bolted on” and include dormant entities which are continuing to incur costs instead of being wound up. This is expensive not just in annual accounting fees, but when you require a valuation of the entities you have an interest in and when you want to exit.
2. Poor financial hygiene and no exit strategy – the last thing you want to think about when you start your own business, is how you’re going to get out. However, it’s essential that business owners plan for their exit if they want to get the best price. Knowing who your successors are, how ownership will be transferred, and what tax consequences apply is critical. It also provides the carrot (or the stick) to ensure you keep the business records clear of private expenses and you have clean tax records. There is no point in establishing a well-ordered structure if you’re not going to use it properly.
3. Engage advisors who stay in their own lane and/or seek your own independent advice – Forensic Accountants are bound by rules which do not allow them to give evidence unless they are a specialist and have appropriate experience in a particular area. Your accountant should not provide you with legal or financial planning advice. In addition, if there is a dispute and you and the person you’re disagreeing with share the same accountant, the Accounting and Professional Ethical Standards (APES 110 and 215) require that the conflict be managed very carefully. Our advice is to ensure one of the parties is referred on to a different accounting firm that they trust. We owe our clients a duty of care and independence is not only in mind, but in appearance.

The Bottom Line

The impact of a dispute reaches further than just a financial impact. You can’t stop change, but you can mitigate the damage on your pocket and stress levels by practicing good financial hygiene:

• Understand your structure and why you need each entity
• Don’t mix business and personal assets; it’s not just a tax risk; clean records make your business easier to sell.
• Ensure your advisors stay in their lane and seek independent advice.

For Helen and Mark, the right accounting advice will help them achieve peace of mind. The aim being to ensure their retirement is secure, their legacy is protected, and both James and Sophie are supported in ways that reflect their very different paths.

Good planning isn’t just about today’s numbers. It’s about future-proofing for whatever life, or business, throws your way.

Contact Pilot

If you would like assistance with any of the matters discussed in this article, please contact Jennifer Veitch on jveitch@pilotpartners.com.au, Angela Stavropoulos on astavropoulos@pilotpartners.com.au, Kristy Baxter on kbaxter@pilotpartners.com.au, or your Pilot advisor on (07) 3023 1300.