Legal Tip 270: An Example of a Serious Structuring Mistake

I see many people making serious ‘structuring’ mistakes. I might put up a few examples to help people learn from the mistakes of others.


Example

Lisa and Millhouse have just married and are buying their first house. They find that they cannot qualify for finance to buy their home as their income falls short. Their broker suggests that Lisa’s father, Homer, ‘guarantees’ the loan.

They apply to the bank on this basis.

The bank tells them they will only lend if Homer is on title to the property. So, Homer is added to the title at settlement. No legal advice was sought on this.

Years later Homer applies for the pension. Centrelink finds out that he owns a property and he thereby fails the assets test as a result. So no pension for Homer.



Homer talks to Lisa. She has wondered why Homer’s name was on the rates notices, but still doesn’t understand the impact of what has happened.

Lisa says not to worry they will just refinance and take Homer off the loan.

Homer explains that he seems to be an owner of the property, and not just a guarantor.

After some legal advice they find out Homer, Lisa and Millhouse all own 1/3 of the property as tenants in common.

Preliminary advice is that removing Homer will trigger CGT on his share – payable by Homer as he is disposing of an interest in property. Homer cannot use the main residence exemption as he has never lived in the property and had used the exemption on his other home which is sold just last week.

Lisa and Millhouse will pay stamp duty on the transfer of Homer’s 1/3 share to them as they are the transferees and it is a dutiable transaction.

Most importantly Homer still cannot get the pension as for Centrelink purposes a transfer without consideration is considered gifting, which it is, and they will count the value of the gift as a notional asset for 5 years after the transaction. If the consideration is market value Homer would still be over the threshold as he would receive a cash equivalent to the value transferred.

This has had a significant impact on the family.


But there is a potential solution.

 

Yeah I have seen some monsters. Generally because they didnt get advice or didnt want to pay for it. And cry me a river when they come back often years later to revisit their newly discovered problem.

One of the worst was caused by a solicitor who is now struck off. He told the client they didnt need to call me since they are qualified to give tax advice. He agreed to settle a legal claim by advising on a deed which explicitly paid fully franked income from a trust. He was later alarmed this clause wasnt evident. Yes it was. The beneficiary cant relinquish the trust entitlements since she is owed a large sum if a property is later sold. She also is considered by Centrelink to own all the trust assets and be entitled to 100% of the trust income. So despite her receipt of a small sum (and a entitlement to trust capital one day !!) she fails the assets and incomes tests and her and her partner get a pension of $0.

How many times have I seen someone setup a trust and buy property and question why land tax is so large ?
Or why the tax losses are quarantined.

The most common. A employee sets up a company to contract as their sole source of income. I then explain the personal services income issues, and the Fair Work concerns. I refer them to a lawyer. One even saw himself with a terminated contract when his colleagues were retrenched and it was costly to sue. Fair Work eventually ruled he was a employee. If he had never made this arrangement he would have received a $240K redundancy not a $35K settlement after costs. Fair Work cant rule on the amount paid for redundancy and as he settled in court it would not have been a bona fide redundancy. ATO refused any concessions.