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

Does Part IVA apply?

This thread theme is a IVA issue.....

 

It would if you are borrowing back at interest and claiming the interest.

If an interest free loan then there are no tax issues.

 

Bumping this thread because I find this extremely interesting...

What constitutes a gift? Do I actually need to go to the bank and TT hundreds of thousands from personal account to trust account, and then TT it back, say, 10 times (say I only have 100k liquid) if I have 1mil of equity I want to protect?

Can I instead just write some memos at home and email them to myself to prove date of 'transaction'?

 

a gift is a irrevocable transfer of title. If you give money but it doesn't change hands then it is not a gift but a promise.

 

So I literally have to go to the bank and TT money back and forth a few times?

Is there a better way than this?

 

Maybe then its a scheme if it creates a tax benefit ?

 

If you want to make a gift you need to transfer title otherwise it is not perfected

 

No tax issues as no interest would be claimed.

 

No tax benefit but certainly an asset protection benefit - has this arrangement been tested in courts? What factors would make this arrangement more/less likely to be defeated by creditors?

I'm not worried about known liabilities (e.g. banks) I'm worried about unknown liabilities (e.g. tenant dies in a fire and sues me).

 

Looks up ss 120 -121 Bankruptcy act and s37A conveyancing act NSW and other state equivalents.

Plenty of cases on these.

 

Thanks

I read the provisions and some cases - so generally speaking the rule of thumb is if one is to set this all up, they're generally solid after around the 4-5 year mark?

One thing I'm still confused about is what good faith is in this context - how can this arrangement be possibly interpreted as having any other purpose other than asset protection? Because the interest rate is 0%...

 

First line of defence is smoke and mirrors
second line is making it more costly to recover
third is to keep it within the bankruptcy rules. "Do it early and do it often"
4th is to not do it for asset protection, but for estate planning.

 

Haha lovely... how would one leave telltale signs in the structuring / planning of all this to indicate it was for estate planning rather than any other purpose? i.e. how would one frame this 'gift and borrow back' arrangement at 0% interest to be for estate planning?

 

This is rather common for estate planning reasons, without necessarily being a bankruptcy asset protection strategy.

One reason could be to segregate trust assets from personal assets as wills can be challenged and be invalid (but keep in mind in NSW trusts can be attacked on death too).

 

Thanks very much Terry and others. Will implement.

 

Really interesting comments above, however, I am trying to understand how this gift and loan back arrangement would impact the capital gain upon selling the asset in question (e.g. a property).

E.g. If a $1m house has a $500k bank loan and the $500k net equity is gifted to a trust and loaned back via a second mortgage..what is the capital gain when the individual owning the house sells it (assuming the values dont move)?

I.e. is the CGT to the individual $0 (since the loan from the trust reduces the cost base) and the CGT in the trust is $500k? Therefore, the net effect is that the capital gain of $500k is transferred from the individual to the trust?

I have read alot about gift and loan structures but there is not much consideration of exiting the arrangement.

 

Loans don't effect CGT generally.

 

Unless the ATO argue its income when its poorly documented. That isnt uncommon in an audit. Its standard approach when ATO review a bank accounts and ask for explanation of credit inflows. Offshore funds called a gift or a family loan....How can you prove that say ATO.

 

The CGT on the property stands alone. The trust only has a CGT event of what it buys and then sells. So if the $500K was used to buy another property in the trust the CGT in the trust is based on THAT property.

 

Yes, any loan should be properly documented in written form.

There is a case of a few years ago where a doctor set up the gift and borrow back strategy using his mum as the recipient of the gift and her lending him back. She was of the Jewish faith and didn't like his new girlfriend and gave him an ultimatum to dump her of she would enforce the loan. It went to court with him arguing it wasn't a real loan or a gift but a scheme for asset protection. Court said all documentation was in order and it wasn't a sham and sided with the mum.