Gift and loan arrangements – patently** not patentable

Following on from posts over the last few weeks concerning gift and loan back arrangements, a question has been raised as to whether the arrangement is proprietary or exclusive to any law firm.

In a word, the answer is: no.

The key case in this regard is Grant v Commissioner of Patents - [2006] FCAFC 120.

In this case the court considered the patentability of the following steps in relation to an asset protection method for protecting an asset owned by an owner, namely:

1. establishing a trust;
2. the owner making a gift of a sum of money to the trust;
3. the trustee making a loan of said sum of money from the trust to the owner; and
4. the trustee securing the loan by taking a charge for said sum of money over the asset.’

In other words a gift and loan back arrangement.

The court confirmed there was no novelty in the steps. Rather they were best described as a business system or method.

In concluding the approach was not patentable the court confirmed as follows:

“It has long been accepted that "intellectual information", a mathematical algorithm, mere working directions and a scheme without effect are not patentable. This claim is "intellectual information", mere working directions and a scheme. It is necessary that there be some "useful product", some physical phenomenon or effect resulting from the working of a method for it to be properly the subject of letters patent. That is missing in this case.”

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 a line in The Talking Heads song ‘Mr Jones’.

View a seriously bizarre music video here:

Took out a loan**? – what does this exactly mean?

Following on from posts over recent weeks concerning gift and loan back arrangements, a question has been raised as to what in fact is a loan.

In theory the definition of a loan should be simple, however it has over time caused some level of debate.

This said, the leading decision is generally accepted as the case of Federal Commissioner of Taxation v. Radilo Enterprises Pty Ltd (1997) 34 ATR 635. In this case it was confirmed that:

1. A loan involves an obligation on the borrower to repay the sum borrowed.
2. It is a simple contract whereby one person ('the lender') pays or agrees to pay a sum of money in consideration of a promise by another person ('the borrower') to repay the money upon demand or at a fixed date.
3. The promise of repayment may or may not be coupled with a promise to pay interest on the money so paid.
4. The essence of the transaction is the promise of repayment.
5. Ultimately therefore, a loan is a payment of money to or for someone on the condition that it will be repaid. Thus it is clear that an obligation to repay forms an integral and indispensable characteristic of a loan.

As usual, please contact me if you would like access to any of the content mentioned in this post.

** For the trainspotters, the title of today's post is riffed from the Black Rebel Motor Cycle club song 'Took out a loan’.

Listen here:

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.

As usual, please contact me if you would like access to any of the content mentioned in this post.

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

View here:

Real (love)** and Money (and sham transactions)

For those interested, following recent posts, the High Court further explored the issues in relation to shams, rejecting the argument that ‘real money’ must change hands before a loan is said to exist in the case of Equuscorp Pty Ltd v Glengallan Investments Pty Ltd [2004] HCA 55.

In reaching this conclusion the court confirmed that the critical aspect was that there was no evidence to suggest that the parties to arrangements were not intending for any outcome other that what was documented.

This was despite the fact that what was essentially a round robin of transfers was evidenced with documentation only.

The decision also see the High Court provide a succinct definition of a ‘sham’, as ‘steps which take the form of a legally effective transaction but which the parties intend should not have the apparent, or any, legal consequences’.

As explored in other recent posts therefore, in relation to a gift and loan back arrangement, properly drafted and validly signed promissory notes, loan and mortgage documents should therefore be legally effective.

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 John Lennon song the surviving Beatles worked up during the Anthology project.

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When you were mine** - An Edelsten case from days gone by

Geoffrey Edelsten has been involved in a number of litigation cases over the years.

Following on from last week’s post which considered the impact the rules concerning sham transactions have on gift and loan back arrangements, it is useful to revisit the decision in Max Christopher Donnelly As Trustee of the Bankrupt Estate of Geoffrey Walter Edelsten v Geoffrey Walter Edelsten and Ors [1994] FCA 992.

Essentially, the case focussed on whether property allegedly acquired by Edelsten during bankruptcy via a series of company structures should have been made available to Edelsten’s creditors.

During the bankruptcy period, these entities were said to be controlled by Edelsten in breach of the Corporations Act 2001 (Cth), before then being formally transferred to him once he was discharged.

Reiterating the key aspects of what amounts to a sham (as summarised in last week’s post), the court confirmed that in this case –

1. A transaction is not a sham merely because it is carried out with a particular purpose or object. If what is done is genuinely done, it should not be deemed to be ‘undone’ merely because there was an ulterior purpose in doing it;
2. Here, the companies involved were real corporations in that they were properly incorporated and administered in accordance with the requirements of the law relating to corporations;
3. Therefore, the key question was whether the acquisition or creation of the businesses of the companies was a sham. In other words, was it in fact agreed and intended that the legal and beneficial ownership of those businesses should be and remain with Edelsten, not the companies;
4. In holding that the structure was valid, the court confirmed a key aspect of the case featured last week, namely, that a structure will not be automatically characterised as a sham because it was undertaken for the purpose of ensuring that any property acquired after bankruptcy did not fall into the hands of a trustee in bankruptcy.

As usual, please contact me if you would like access to any of the content mentioned in this post.

** For the trainspotters, the title of today's post is riffed from the Church song 'When you were mine’.

View here a version from Countdown:

 

A further (& deeper)** gift & loan back case

Previous posts have looked at various aspects of gift and loan back arrangements, including arguably the leading case in the area Atia v Nusbaum [2011] QSC044 (Atia).

Further case law support for the position outlined in Atia, is provided by the earlier decision Sharrment Pty Ltd v Official Trustee in Bankruptcy (1988) 82 ALR 530 (Sharrment).

In this case it was held that for a transaction to be considered a sham, the parties must intend that the acts or documents giving rise to the transaction ‘are not to create the legal rights and obligations which they give the appearance of creating’.

Essentially this means the courts examine ‘whether the act or document was never intended to be operative according to its tenor at all but rather was meant to cloak another and different transaction’.

In Sharrment, a series of complex transactions were implemented that were designed to place assets out of the reach of creditors, with the outcome being an at risk individual owed a debt to the trustee of a family trust.

1. The court held that the transactions did not constitute a sham arrangement. This was the case despite the following factual matrix:
2. The transactions were essentially circular and arguably lacked an objective commercial purpose;
3. There was a ‘round robin’ of cheques (as opposed to a physical transfer of funds) and not all parties had sufficient funds to make good on the payments anticipated by the cheques;
4. The loans created were interest free and repayable at call;
5. The at risk individual could essentially control any loan repayment requirements in his discretion, given he had ultimate control (via an appointor role) of the family trust that made the loans;
6. It seemed reasonable to assume there was ‘ulterior purpose’ of the arrangements of protecting the at risk individual’s wealth from creditors, which created an ‘unpleasant aura’;
7. If an ulterior purpose was present however it counterintuitively supported the validity of the arrangement, given the ulterior purpose would only be achieved if the transactions were intended to be valid and not a sham.

As usual, please contact me if you would like access to any of the content mentioned in this post.

** For the trainspotters, the title of today's post is riffed from the Church song from their ‘Further/Deeper’ album and 'Miami’.

View here:

Gift and Loan Back Arrangements – A Practical Example

Earlier posts have looked at various aspects of ‘gift and loan back’ arrangements – see -

http://blog.viewlegal.com.au/2014/03/leading-gift-and-loan-back-case.html

http://blog.viewlegal.com.au/2014/04/how-gift-and-loan-back-arrangements-work.html

http://blog.viewlegal.com.au/2014/04/gift-and-loan-back-arrangements-some.html

As set out in earlier posts, and with thanks to the Television Education Network, today’s post considers some related practical issues in relation to gift and loan back arrangements in a ‘vidcast’ at the following link - https://youtu.be/hJy0OyOuLfE

As usual, an edited transcript of the presentation for those that cannot (or choose not) to view it is below –

Having done the trust split, what you might look at doing is a gift and loan back. That is to say the trustee that sits over a split trust will arrange for assets that are equal to the underlying interest in the asset to be gifted into a brand new trust.

The new trust will generally be a stock standard family trust that's controlled by the relevant beneficiary.

If the split trust makes a capital gift of the underlying capital value, not the interest in the asset itself, then what is being gifted is the dollar value of the asset as a cash gift. It can be a promissory note, round robin of cheques or whatever it needs to be.

The funds are gifted into a trust that’s controlled by the relevant beneficiary. What the beneficiary then does is lends that money back into the split trust.

That is step 1 is the gift.

Step 2 is the loan.

But at the same time as that new trust is making that loan, it will also take a mortgage out over the underlying assets in the split trust.

Thus you have effectively synthetically moved all of the equity out of the split trust into a brand new trust, which is absolutely controlled by the relevant beneficiary.

Furthermore, there's no mortgage duty on a gift and loan back arrangement. In other words, you can do all of the gift and loan back arrangement without any transaction costs.

The beauty of the strategy is that it still maintains the integrity of the initial trust split, but gives each of the ultimate family members, no matter what might go wrong between the family at that split trust level, the ultimate ability to call in that debt. While they might actually have to sell the underlying asset at that point, they will still ultimately have the underlying equity where it needs to be (that is in their sole control).