Legal Tip 289: What is a Promissory Note?

Discussion in 'Legal Issues' started by Terry_w, 21st May, 2020.

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  1. Terry_w

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

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    A promissory note is like an IOU or cheque, it is basically a promise by someone to pay someone else money. It is not a loan as that is where someone lends someone else money and it is not a gift as that is when someone gives someone else money or something – title of the item changes hands.


    The promise to pay can be in the form of a written agreement with the amount being payable on demand or by a specific date.


    When should they be used?

    Probably very rarely, if ever.

    They could be used where some ones someone else to be indebted to them, but at their choice.

    Example – Homer wants Barney to promise to pay him money, but doesn’t want to act on it yet. Barney can make a promissory note in favour of Homer. It is not a debt until Homer says ‘pay up’.



    Can you make a gift using a promissory note?

    I don’t think so.

    A promissory note is just a note with a promise. It is not title to the asset that is the payment in the note. So, if you wanted to give $100 to someone and you just gave them a $100 note, that would be an effective transfer of the $100. However, if you gave them a promissory note instead the $100 has not been yet been transferred. It might still be enforceable though. The recipient of the $100 promissory note could sue the person who promised the $100 – but that does not make it a gift.
     
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  2. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

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    BILLS OF EXCHANGE ACT 1909 - SECT 89 Promissory note defined

    Promissory notes are a form of bearer security (usually but can be issued to a named party) but can also be assigned under the Act by endorsement. I say security using that term quite loosly since there may be no security as such. However the capacity of the issuer to meet the obligation may be questioned. In financial markets credit rating are usually assigned to PNotes....AAA+ like BHP. Many banks issue PNotes even to official market dealers and other banks. PNotes like bank bills are typically issued and onsold using a discount rate as the bearer will have right to a fixed face value on a specific date. Rare, I have seen a security attached. eg BHP (pre Billiton days) would isssue PNotes which were gold backed if the debt was not paid. Physical gold or futures delivery were often used. eg 100oz. I think the regulated futures market killed that off.

    A PNote can be used for some technical slight of hand. A SMSF cant lend or borrow BUT could be a party to some promissory notes.
    LightYear Docs indicates a smsf should be party to PNote of a3month or shorter duration. Highly effective to enable some short term funding

    ASIC regulations MUST be complied with of course
    IR 03-16 ASIC regulation of promissory notes | ASIC - Australian Securities and Investments Commission

    PNotes can also be afeature of some dubious tax scheme using round robin loans and issue of notes which offer no secured basis of promise and lack all arms length objectivity.
     
    Last edited: 21st May, 2020
  3. Mark F

    Mark F Well-Known Member

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    Many bank notes have aspects of promissory notes. Having a quick look at a UK 5 pound note, it has the words "I promise to pay the bearer on demand the sum of five pounds". I think US notes have something similar. Australian notes just say they are "legal tender".
     
  4. qak

    qak Well-Known Member

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  5. Terry_w

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

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    Here I am not talking about regulated promissory notes, but the type that are typically used in so called asset protection strategies.

    I am coming across some people who have signed some with no understanding how they work and which will not be effective.

    There must be a couple of promoters out there at the moment.
     
  6. Apollo

    Apollo Active Member

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    Dominique grubisa uses promissory notes as part of her snakeoil asset protection product. Except she has no understanding of them
     
  7. Apollo

    Apollo Active Member

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    For a start a promissory note has to be to pay a certain sum. the self professed leading expert in finance law can’t even get basic concepts like that correct.
     
  8. Scott No Mates

    Scott No Mates Well-Known Member

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    I'm on a promise but it may be wishful thinking :oops:
     
  9. SatayKing

    SatayKing Well-Known Member

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    Subject to annual renewal and a one-off user code?
     
  10. Mark F

    Mark F Well-Known Member

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    Subject to a cooling off period no doubt. Remember only redeemable if demanded.