Tuesday, October 5, 2021

Statute barred** loans and structuring advice

Last week’s post touched on statute barred loans from a Division 7A perspective.

The issues in relation to statute barred loans are often highly relevant in the context of estate planning and asset protection exercises.

In particular, amounts that have often built up over many years can in theory become unrecoverable automatically six years after they were initially made.

In a practical sense, so long as all parties to the arrangement are aware of the automatic forgiveness, steps can normally be taken to ensure that there are no unintended consequences triggered.

For example:
  1. If the existence of the loan is acknowledged at any point, this automatically restarts the 6-year period.
  2. Acknowledgement can be achieved simply by making even a nominal repayment of the loan or charging of interest.
  3. There is also the likelihood that if the parties to the loan have signed the financial statements where the loan is evidenced, this will be sufficient to create the requisite acknowledgement.
  4. Care must however be taken in relation to the previous point, for example, if there is a loan between a trust and a beneficiary, and that beneficiary is also a director of the corporate trustee of the trust, then there would appear to be a valid argument that notification has been given.
  5. In contrast, if the loan is between the trust and a beneficiary, who is not otherwise in any way involved in the trust, then proving that they were aware of the loan and acknowledged its existence may be impossible.
As usual, please contact me if you would like access to any of the content mentioned in this post.

** for the trainspotters, the title today is riffed from the David Bowie song ‘It’s no Game (Part 2)’. View hear (sic):