Statute of limitations** and division 7A

Under legislation in each Australian state, there is a prohibition on bringing a claim on certain actions, generally once 6 years have elapsed from the date from which the cause of action arose.

Generally, loans that are the subject of division 7A under the Tax Act will be at call loans.

As the Tax Act deems loans that become unrecoverable due to the expiration of a limitation period to be automatically forgiven, it is important to determine the date on which a loan is deemed to begin.

Historically, there was at least some support for the argument that the start date for limitation period purposes was the date that a demand was made for repayment of the debt or the last date a formal acknowledgement (including by way of part payment) was made.

This position was at least partially due to the fact that under the relevant limitation legislation in each state, an acknowledgement must generally be made in writing by the debtor to the creditor, and be signed by the debtor

The decision in VL Finance Pty Ltd v Legudi [2003] VSC 57, which has been accepted by the Tax Office, confirms however that the limitation period for the purposes of division 7A begins to run immediately on the date that an at call loan is made, not from the time when the first call for repayment is made.

Furthermore, while at law a loan can be 're-established' by an acknowledgement or part payment even after the expiry of the limitation period, for tax purposes, under division 7A, if the limitation period expires the debt is immediately forgiven permanently at that point in time.

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 Pearl Jam song 'Big wave’.

Listen here:

 

Divorce as a (last) exit** event under a shareholders’ agreement

With the annual spike over the festive season in family law issues, it seemed timely to consider the issue of how the divorce of an individual principal of a company can be addressed under a shareholders’ agreement (or similarly under a partnership or unitholders agreement).

Broadly we see the 2 main approaches as being:

1. having divorce as a specific triggering event allowing the other owners to buy the divorcing shareholder’s interest; or
2. drafting a right of first refusal and pre-emption arrangement broadly enough to capture any proposed transfer as a result of a divorce of a shareholder.

Our approach generally is the second alternative outlined above, unless there are specific reasons to adopt some other process.

Normally there would not be any vendor financing arrangements included into the agreement, although these can always be agreed between the parties at the date of sale, if they are on amicable terms.

It is important to note that any shareholders’ agreement should not be intended to avoid complying with any obligations under a property settlement, rather it should make sure that the non divorcing owners can continue to run the business in the most effective way without being in business with a principal’s spouse or an unrelated third party.

** for the trainspotters, ‘Last exit’ is a song from Pearl Jam. View hear (sic):

When is a joint tenant not (for you)** a joint tenant?

In the context of recent posts, it is an important estate planning issue to understand that where an asset owned on title records as joint tenants is a partnership asset it will be deemed to in fact be effectively owned as tenants in common.

If this deeming rule applies then the death of a partner essentially causes the value of their interest to pass under their will, and not by survivorship to the other owners.

The Partnership Acts in most states codify the rules in this regard. These rules generally state that unless the contrary intention appears, property bought with money belonging to the partnership is deemed to have been bought on account of the partnership and is considered partnership property.

The rules in this area were perhaps best explained in the case of Spence v FCT [1967] HCA 32. As usual, if you would like a copy of the case please let me know.

In this case it was relevantly held:

“It is … a mistake to say she got it simply by virtue of her joint tenancy. The legal estate devolved in accordance with the joint tenancy.

To that extent the maxim which was mentioned – ‘ius accrescendi inter mercatores locum non habet' – does not apply: see Lindley on Partnership, 11th ed. (1951), p. 428.

But it is applicable in equity; partners who hold as joint tenants in law hold beneficially as tenants in common.

That is an old rule.

It is more exactly stated today in terms of the Partnership Acts (the relevant provisions are ss. 30 and 32 in the Western Australian Act) the legal estate devolves according to its nature and tenure but in trust so far as necessary for the persons beneficially interested; and as between partners land which is partnership property is to be treated as personal estate.”

The ‘old rule’ reference in the quote above comes from cases such as Lake v. Craddock (1732) 3 P Wms 158; 24 ER 1011. Again, if you would like a copy of the case please let me know.

** for the trainspotters, another classic song from Pearl Jam this week, namely ‘Not for you’.

When possession is 10**/10ths of the law

The interplay between legal principles, family law rules and estate planning can be complex.

Arguably, one of the highest profile examples of this was the High Court’s decision in Stanford, which was analysed in an earlier post (please contact me if you would like access to this content).

The decision in Paxton v Paxton [2016] FCCA 1689 (7 July 2016) provides another useful example. As usual, if you would like a full copy of the decision, please let me know.

Broadly, the factual matrix was as follows:

1. A married couple owned a home as joint tenants, as opposed to tenants in common.
2. Some years later, the husband of the marriage and commenced a de facto relationship.
3. Some years later again, the husband then commenced property proceedings seeking division of the matrimonial home, although he died before any decision was handed down.

The court confirmed that the key principle from Stanford contained two limbs namely:

1. Would the court have made an order in relation to property if the relevant party had not died?
2. Is it appropriate, despite the death, to still make that same order?

In confirming that the wife was entitled to keep the entirety of the property as the surviving joint tenant, the court confirmed:

1. So long as property proceedings commence before death, the person’s estate is permitted to continue with the proceedings.
2. Even though the parties had previously agreed that the property should be sold, the court refused to enforce this on the basis that it would not be just and equitable in all the circumstances. The relevant circumstances included the fact that the wife was of ill health, financially destitute, had limited employment prospects and had to care for an adult child from the marriage who had a disability.
3. Furthermore, the executor of the former husband’s estate was required to pay the wife’s costs of the proceedings.

While obviously open to conjecture, there is every chance that if the joint tenancy ownership of the property had been severed so that the parties owned it as tenants in common, the husband’s estate would have been likely entitled to retain most, if not all, of the 50% interest.

In this regard, it is important to note that the joint tenancy can be severed by the unilateral actions of one party (i.e. without requiring the consent of the other owner or owners as the case may be).

** for the trainspotters, a classic song from Pearl Jam’s album ‘Ten’, namely ‘Even flow’.