Legal Tip 287: Gifts with No Transfer Do Not Work: Asset Protection

Discussion in 'Legal Issues' started by Terry_w, 9th May, 2020.

Join Australia's most dynamic and respected property investment community
  1. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

    Joined:
    18th Jun, 2015
    Posts:
    41,667
    Location:
    Australia wide
    There are many asset protection promoters out there promoting dubious strategies which do not work.

    One strategy involves gifting ‘equity’ in a property to a trust and borrowing it back and allowing the trustee to take a mortgage over the property owned by the individual to supposedly secure its debt.

    This is known as the ‘gift and borrow back strategy’ and it can greatly improve asset protection on bankruptcy, and death, if done correctly. Unfortunately, it rarely is done correctly.

    For a gift to be effective title of the gift must be transferred. If title doesn’t transfer the gift will fail – with some limited exceptions. This is basic legal theory studied in first year law at uni.

    A gift without transfer is just a promise.

    Gifting equity – you cannot gift equity as it is not an asset – neither tangible nor intangible. Equity is the value less the debt on an asset. You could assign an asset with its debt, but that would create a CGT even and trigger stamp duty too possibly – depending on the asset.

    The way around this is to gift cash as there are no CGT events or dutiable transactions triggered when cash is gifted.


    Example

    Homer has a $1mil main residence and $600,000 loan secured against it which was used to buy it a few years ago.

    The equity is $400,000.

    Homer cannot gift $400,000 in equity. If he assigns his interest in the house it will trigger a CGT event and stamp duty.

    He could gift $400,000 cash if he has it.


    With cash you transfer title by handing it over. If you want to transfer $100 to a trust you give $100 to the trustee of that trust – either by hand or by bank transfer. There are no registration papers like there would be with gifting shares, cars or property.

    If you say you “I give you $100” but then nothing happens, this $100 has not changed hands. It is still yours and is merely a promise at that stage. It doesn’t matter if you draw up a deed or not. If the $100 doesn’t change hands nothing has happened – basic law.

    Similar if you are borrowing money. If you enter into a written loan agreement with a trustee to borrow $100, if that trustee hasn’t transferred $100 to you, or paid it at your direction, then there is nothing owed.

    Its like a credit card. If you have $100 limit but do not use the card then you owe the credit card company no money.


    So, when Homer does a deed to gift $400k to a trustee of a discretionary trust and the money is not given, then there is no gift made. When Homer subsequently borrows $400,000 by signing written loan agreements if there is no movement of money from the trust then there is no loan, or if there is a loan it is a facility which remains undrawn.

    As such any mortgage lodged by the trustee over Homer’s property will not be securing anything. It will be ineffective.


    So if you have tried to implement the gift and borrow back strategy but transfers haven’t happened then you have not really done anything to improve your asset protection status.
     
    Archaon likes this.
  2. CraigI_55

    CraigI_55 Member

    Joined:
    1st May, 2020
    Posts:
    12
    Location:
    Australia
    This is very useful tip thank you Terry.

    Given that it is an internal transaction, I've heard lawyers say that the equity gift may be achieved through a form of non-cash consideration such as a promissory note, rather than actual transfer.

    If not possible, I'm thinking this would be a poor strategy to use for a family home - where one would lose the PPOR exemptions, plus pay stamp duty, plus have to refinance the home loan to achieve it.
     
  3. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

    Joined:
    18th Jun, 2015
    Posts:
    41,667
    Location:
    Australia wide
    I've discussed the promissory note strategy with more senior structuring lawyers and they say it is a weak argument.
     
    CraigI_55 likes this.
  4. Apollo

    Apollo Active Member

    Joined:
    19th Aug, 2019
    Posts:
    31
    Location:
    Aus
    Agree with Terry. I’ve seen examples where the supposed promissory note fails the basic requirements- it doesn’t even identify a specified sum. People should also be aware of the circumstances in which gifts may be clawed back in bankruptcy as voidable transactions. Terry has explained these on posts here. There’s a lot of rubbish spruiked by certain people who proclaim to be asset protection specialists. Their advice shows them to be anything but
     
    Joe Z, CraigI_55 and Terry_w like this.
  5. AndrewM

    AndrewM Well-Known Member

    Joined:
    15th Apr, 2020
    Posts:
    298
    Location:
    Adelaide SA
    If Homer doesn't have the cash available, is there any way for him to access short-term funding so a physical transfer can take place?

    I.e. Homer was to borrow $400,000 from the Bank. Homer then gifts this $400,000 to the Trust and the Trustee subsequently loans $400,000 back to him with the transfer physically happening in both directions. Homer could then use the $400,000 to repay his debt to the Bank.

    Is this even possible? And I guess if so, I'm assuming the cost would be pretty significant?
     
  6. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

    Joined:
    18th Jun, 2015
    Posts:
    41,667
    Location:
    Australia wide
    Yes Homer could borrow, make the gift, borrow it back and then repay the original lender.

    Unlikely that a bank would lend Homer though as they will only go to 80% LVR, without LMI, so Homer would need to borrow from a related party, a relative perhaps.
     
  7. Apollo

    Apollo Active Member

    Joined:
    19th Aug, 2019
    Posts:
    31
    Location:
    Aus
    theres no guarantee that the existing lender would agree to the registration of a second mortgage. I’ve seen one supposed expert tell clients what the bank doesn’t know won’t hurt them. No won’t hurt the bank but is almost certainly to put the owner in breach of existing mortgage if done without the consent of the existing lender.
     
    CraigI_55 and Terry_w like this.
  8. CraigI_55

    CraigI_55 Member

    Joined:
    1st May, 2020
    Posts:
    12
    Location:
    Australia
    So even if it was a related party, the way that the clawback would work is that the gift would be deemed clawback-able, and therefore the mortgage in favour of the trust is unenforceable?
     
  9. CraigI_55

    CraigI_55 Member

    Joined:
    1st May, 2020
    Posts:
    12
    Location:
    Australia
    Yeah I wondered about this, the lawyer who offered to do one for me said they would liaise with the banks on my behalf, but that would be an extra $500 plus gst.
     
  10. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

    Joined:
    18th Jun, 2015
    Posts:
    41,667
    Location:
    Australia wide
    It would depend how it was attached and under which law. The recipient might be ordered to give it back.
     
  11. Joe Z

    Joe Z Member

    Joined:
    18th Jun, 2023
    Posts:
    15
    Location:
    NSW
    @Terry_w Lets say I have spare 40k.Can I send 40k back and forth 10times over 10-20 days to make it a valid 400k gifted and loaned back transaction?
     
  12. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

    Joined:
    18th Jun, 2015
    Posts:
    41,667
    Location:
    Australia wide
    think about it
     
  13. Piston_Broke

    Piston_Broke Well-Known Member

    Joined:
    30th Jul, 2015
    Posts:
    4,081
    Location:
    Margaritaville
    Homer can write up a deed where he is the trustee and not a beneficiary.
    And the beneficiary is the gift receiver.
     
  14. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

    Joined:
    18th Jun, 2015
    Posts:
    41,667
    Location:
    Australia wide
    what is Homer trying to achieve? If the recipient of the gift if a beneficiary then it would be a gift to the beneficiary and not the 'trust'
     
  15. Piston_Broke

    Piston_Broke Well-Known Member

    Joined:
    30th Jul, 2015
    Posts:
    4,081
    Location:
    Margaritaville
    Asset protection, as per the title.
    Homer has the asset in his name, but it's not really his.

    And beneficiaries don't even need to sign the deed.
    They may not even know it exists. Yet it's ultimately his/her property.
     
    Last edited: 19th Jun, 2023
  16. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

    Joined:
    18th Jun, 2015
    Posts:
    41,667
    Location:
    Australia wide
    It is possible for someone to be trustee for someone else and hide the beneficial ownership
     
  17. Joe Z

    Joe Z Member

    Joined:
    18th Jun, 2023
    Posts:
    15
    Location:
    NSW
    Is it because ATO will focus on round robin transaction?
     
  18. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

    Joined:
    18th Jun, 2015
    Posts:
    41,667
    Location:
    Australia wide
    What would it have to do with the ATO? If not interest is charged there will be no tax consequences
     
  19. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

    Joined:
    18th Jun, 2015
    Posts:
    23,319
    Location:
    Sydney
    Its very common for assets to be a name that isnt the owners name...or no name.

    Eg Grandpa dies and has three properties. Nobody even got around to transfer title to Homer as Grandpas will says. Homer dies and Marge says...Hey they are mine as Homer will says its all mine. She doesnt get to change title and dies months later. Her probate includes these assets. Kids learn all this and have a party. They thought Mum & Dad only owned Evergreen Terrace and a old pink car.
     
    Joe Z likes this.
  20. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

    Joined:
    18th Jun, 2015
    Posts:
    23,319
    Location:
    Sydney
    It may be argued Homer couldnt gift to the trust as it wasnt his money to gift. The bank says - We have a claim on our money. If the bank is repaid then there is no loan. The gift was a sham and all Homer did was lend to and from then discharge that loan. Round robin. Why would he do this ? Its a common element to a tax scheme of course and if interest or timing seeks to reclassify something the whole of the round robin must be considered.

    This happened with Wickenby. Local co paid $1m to a Vanuatu entity and it was called a loan to get around a division 7a loan problem if the co paid this to Mr Smith the main Director. Vanuatu managed to repatriate this to Mr Smith in Sydney through a international law firm based in switzerland. Loan to vanuatu is a loan to in the company books or a investmnet in vanuatu. ...Mr Smith later says I didnt get any cash. Mr Smiths company says we cant recover our loan to vanuatu. ATO says we know you did this as we intercepted records of this deal. Mr Smith you are charged with evasion. Loans arent always loans. Gifts arent always gifts. ATO says - Mr Smith its income !!