Tuesday, July 26, 2022

A summary about promissory notes: avoid a cold sweat**

Following on from posts over the last few weeks concerning gift and loan back arrangements, a question has been raised as to how the funding of any gift (and subsequent loan) can occur.

Certainly, the conservative view is that there is the physical transfer of funds by way of electronic transfer or bank cheque. Where this is not possible there are generally two other approaches that can be utilised.

The first is simple endorsement of a cheque. If this approach is taken it is critical that the original cheque (or at least copies of it) is retained indefinitely.

The other approach is the use of promissory notes.

The Bills of Exchange Act 1909 (Cth) defines a ‘promissory note’ as follows:

‘A promissory note is an unconditional promise in writing made by one person to another, signed by the maker, engaging to pay, on demand or at a fixed or determinable future time, a sum certain in money, to or to the order of a specified person, or to bearer.’

It has been accepted by the courts that promissory notes are considered equivalent to cash at law.

Arguably the leading confirmation of this position is the decision in Fielding & Platt Ltd v Selim Najjar [1969] 1 W.L.R 357, where relevantly it was held –
'We have repeatedly said in this court that a bill of exchange or promissory note is to be treated as cash.

It is to be honoured unless there is some good reason to the contrary.'
Therefore, the endorsement of promissory notes can legally discharge the financial transactions contemplated by a gift and loan back arrangement.

Further assurance about the effectiveness of a validly created promissory note can be found from the Tax Office in relation to superannuation contributions and its ruling TR 2010/1.

This ruling lists a range of methods for the making of valid superannuation contributions, including cash, electronic funds transfer, money order, bank cheque, personal cheque, post dated personal cheques that are presented promptly and promissory notes.

In relation to promissory notes, the Tax Office confirms its view that the two key requirements (in a superannuation context) are that the payment demand is proximate to the issuing of the note and that the note is then honored.

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** For the trainspotters, the title of today's post is riffed from the Sugarcubes song 'Cold Sweat’.

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