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The Dangers of Lending to Loved Ones

Robert Kite

02 Mar 2020

The Dangers of Lending to Loved Ones

Real Estate Purchase
Given the costs associated with the acquisition of real estate in the current market, it is becoming common for parents to advance funds (unsecured) to their children in order to assist them in buying their first home.  The funds advanced usually form part of, or all of the deposit for the property, which assists their children obtaining finance to purchase the property.

For the most part these arrangements go to plan.  But what happens when the plan fails?

In a scenario where the owners of the land are registered as Joint Tenants, and one of those owners becomes bankrupt, the Trustee in Bankruptcy will seek to deal with the estate’s interest in the property.

Should this situation arise, the parents (or certain limited other relations) who advanced the funds to allow for the property to be purchased in the first instance, often seek to claim as a creditor of the Bankrupt Estate.  More often than not, they also seek to claim some equitable interest in the property on a resulting trust basis.  This is on the premise that the property could not have been purchased without the funds having been advanced by the related party in the first instance.

In circumstances such as these, the Trustee in Bankruptcy is entitled to rely on the presumption of advancement.  The presumption is that in the absence of documentation or other evidence which confirms the actual intention of the parties at the time the transaction is entered into, the funds advanced were intended to be a gift. The onus in this case would be on the parents to rebut the presumption.

If the parents are unable to rebut the presumption, they will not be able to maintain any equitable claim in the property.  Further, they will not be considered as creditors of the Bankrupt Estate.

It is also noted in most cases, that in applying for a mortgage, there might be other documentation that identifies the advance of funds as a gift. It is not uncommon for a Bank to seek a declaration from the borrower that the deposit funds are a gift.  That would add further weight to the Trustee’s position that the related parties do not have an equitable claim in the property, nor would they be creditors of the Bankrupt Estate.

Other Unsecured Lending
The presumption of advancement also applies to unsecured lending.  Absent documentation being prepared to record the terms of any loan, if challenged it will become the obligation of the lender to rebut the presumption and to prove their position as a creditor of the Bankrupt Estate. It is often not commercial to consider any challenge to the loans on an unsecured basis using the presumption of advancement, as the costs incurred inevitably would be greater than the benefit obtained by the Estate.

Options

If parties are seeking to provide funds to their loved ones to assist in the acquisition of any real property, or any other assets for that matter, it is imperative that those terms are documented at that time.  Absent such documentation being provided, the ability of the party who advances funds to make any recoveries in relation to same will be at risk.

A better approach is to also obtain some security, such as a mortgage or other Personal Property Securities Register, and ensure those security interests are registered at the time the loan documents are executed.

Additional Arsenal for the ATO

As a result of the implementation of the Single Touch Payroll regime (“STP”), the Australian Taxation Office now has far more real time data available to it than it has ever had.  

The real time data will now allow the ATO to determine on a much quicker basis those entities who have not been remitting their PAYG obligations.  Further, the ATO will now have data to assist in determining amounts which may be owing under the Superannuation Guarantee Administration Act.

Given the data now available, one can only expect that the ATO will become more vigilant in the recovery of funds owing by those employers who have failed to remit PAYG and / or other obligations to the ATO.

The data available will also provide information for the ATO to consider issuing Director Penalty Notices.

For any individuals or organisations who are struggling to meet their obligations with the ATO, or other parties please contact this office in order that we may discuss some of the options available to deal with those issues.

Combating Illegal Phoenixing Bill


On 5 February 2019, Parliament passed the Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019.

On 17 February 2020, the Bill received Royal Assent. The phoenixing provisions came into effect on 18 February 2020 and 1 April 2020.

The purpose of the Bill is to introduce new powers for both ASIC and Liquidators to seek to make recoveries in relation to phoenix transactions.  There are also further provisions in relation to criminal and civil penalty provisions for company officers who engage in such phoenix activity.  There are also further powers available to the ATO to recover certain GST obligations as part of the Bill.

Further details in relation to the Bill will be the subject to our next newsletter.






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