Leasing to a related entity – avoid the PPSR sting

Is your equipment protected from a business insolvency?

Registering your equipment lease agreements on the Personal Property Securities Register (PPSR) is an important part of asset protection that is often overlooked.

Failure to register can be an expensive mistake for any business owner who operates their business through one entity and owns their equipment in a separate entity. Read on to find out how to avoid the PPSR sting.

If you are leasing a commercial real property to a related entity, then read this article.

Why operate your business in one entity and own your equipment in another?

Whether you run a dental practice, a concreting business or a café, it’s a good strategy to operate your business through one entity (usually a company) and own your valuable equipment in another entity (known as a “holding entity”). This gives you what we call structural asset protection.

All the business risk lies with your trading company, so if something goes wrong (e.g. your company is sued by a creditor) the liability stops with your company. If the equipment used in your business is not owned by the company (but merely leased to it by the holding entity), it is not vulnerable to the company’s creditors. But this protection falls over if you fail to document and register the equipment lease.

Document the equipment lease

For this asset protection strategy to work, you first need a formal equipment lease agreement between your entities.

The equipment lease will record the terms of the lease, including the duration and the lease fees payable. Most importantly, it will record the fact that ownership of the equipment remains with the holding entity, not with the trading company.

Registering the security interest

So far so good, but you’re not protected just yet.

With the introduction of the PPSR in January 2012, your holding entity is also required to register its interest in the leased equipment on the PPSR.

The PPSR acts as a public notice system for interests in personal property (which includes equipment). Failure to register your interest means no one knows you have an interest – including a future liquidator of your trading company if things go south. In that case, the leased equipment forms part of the assets of the insolvent trading company and can be sold to satisfy creditors’ claims.

This undoes all the benefit of having structural asset protection in the first place. It also means you have lost equipment you otherwise should have retained.

We can help!

We can help put in place a formal equipment lease agreement or register your interest on the PPSR. Call us now on 1300 654 590 to talk to one of our lawyers.

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