Legal Tip 115: The Gift and Borrow Back Strategy, Part 1

"Clawbacks can be made on under market value transactions." would 0% p.a be considered under market value for asset protection sake?

 

Not sure I follow. What does that achieve?

 

It builds up assets in the trust and deplete's assets from yourself.

 

No because the asset is not transferred from the trust. The loaned money still belongs to the trust.

But there are other ways in which this could be attacked.

 

Ok, but that still doesn't help to claim the interest paid to the bank, right?

 

There would be no interest to claim (nor incurred) in this situation.

 

I mean the interest paid to the bank to release the equity and gifting the equity to the trust, as per the situation described before with John. Or are you saying that gifting your wage to the trust is an alternative to gifting the equity strategy, not in addition to it?

 

Yes, as an alternative.

 

Ah ok. That sounds like a more genuine plan IMO, if it ever came under attack because they're regular contributions as opposed to one lump sum that was gifted. Maybe an alternative would be not gifting 100% of the wages, but part of it, similar to giving regular contributions to a Super fund.

 

Is the 4 year clawback timeframe relevant to family court as well?
And is it possible to gift in one direction, and then have it gifted back a few years later when the risk has reduced? If there was a tax benefit gained from doing this in addition to the asset protection would ATO get their Part IVA out to try and tax more?

 

No
yes
yes

 

Which are the ways could it be attacked, if it is a regular transaction spanning possibly many years?

 

s37A conveyancing act NSW
s301 bankruptcy act
s121 bankruptyc act
s139L(1)(a)(vi) of the Bankruptcy Act
Contract law
Laws of Equity
ATO garnishee notices
Sham


Trust could be attacked

Family Law

Family Provision

etc

 

All of those are applicable if gifting a large lump sum as well, right? I.e. gifting a salary every month does not make it more likely to be attacked.

Why would this involve ATO garnishee notices? Gifting your salary to a trust every month and borrowing it back does not bring any tax advantage, or does it?

 

It all depends on the situation.

If you are going bankrupt and haven't paid tax the ATO may be able to get in there and take priority over the trustee which has a mortgage (for example).

 

Regarding the borrow back, i.e. the loan from the trust after the gift has taken place, does this have to be at commercial interest rates or can it be at 0%? Will the ATO flag this if it is at 0%?

The primary purpose is asset security and there is no tax advantage that I can see.

Legally it seems it can take place as long as the trust deed allows gifts and 0% interest loans to beneficiaries.

It seems a good way to asset protect cash held in personal names as well as equity in your home if this is owned in a personal capacity. My concern is ATO treatment of the 0% loan.

 

It could be at 0%. No reason for the ATO to be concerned as there is no income generated and therefore no tax deductions.

 

Hi Terry,

May I ask how can we gift the equity in a property to a trust without change the ownership of the property? will this be legally valid?

 

You can't!

To gift something you have to deliver it to be legally effective. A gift not handed over is not a gift.

If you assign an interest in a property it would be a dutiable transaction.

The gift and borrow back strategy works for gifts of cash that are physically handed over. Title changes hands - title of the cash - as it goes from your bank account to the trust bank account. You then borrow it back after entering a written loan agreement.

Anyone can put a mortgage over property with the owner's consent, but the mortgage has to secure something - such as security for a loan.

A security for a promise won't work because the asset is still yours until you have gifted it.

 

thank you Terry