No debate** - Can shares be owned as tenants in common?

Recent posts have considered various aspects of the rules in relation to assets owned as joint tenants.

Another aspect of the rules in this area that continues to cause debate relates to the manner in which shares in a company may be owned.

Often a constitution of a company will mandate that shares registered as owned by 2 or more people may only be owned as joint tenants. Often the constitution will also state that the name first listed on the share register will have all voting rights in relation to the shares.

Where a constitution of a company does not set out that joint share owners must own as joint tenants the issues are more complex if a will does not distribute a discrete number of shares to separate people. That is, instead of (say) giving 100 shares to A and B, giving 50 shares to A and 50 shares to B.

Despite there being a number of conflicting cases, it appears as though the long standing decision in McKerrell [1912] 2 Ch 648 continues to apply. In that case it was held that despite a will stating that the recipients of the gift of shares were to take as tenants in common – ‘That is not possible. At least, it is not possible that a chose in action, such as shares, can be held as tenants in common at common law’.

In other words, the only assets that can be owned as tenants in common at law are real property and chattels. This means, as one example, bank accounts in joint names are deemed to be owned as joint tenants. This is because there is essentially a chose in action, being the contractual right of the account holders against the bank, for recovery of a ‘debt’ (being the balance from time to time in the bank account).

Another example in this regard is the well known case of Equititrust Ltd & Anor v Franks [2009] NSWCA 128, where it was held in relation to a debt (and related mortgage), that the common law presumption of a joint tenancy applied despite the deeming provisions under legalisation that would have otherwise seen the parties hold as tenants in common.

As usual, if you would like copies of any of the abovementioned cases please contact me.

** for the trainspotters, the title today is riffed from the Breeders song ‘Lord of the thighs’. View hear (sic):

Assuming makes an a%& of you and me ... presumptions** and jointly owned assets

Last week’s post considered various aspects of the rules in relation to assets owned as joint tenants.

At law there is a presumption that where property is gifted to two or more people, they receive that property as joint tenants (subject to any contrary intention).

A number of jurisdictions have also enacted legislation confirming this outcome, including Western Australia, South Australia and Victoria.

In New South Wales and Queensland however there is legislation that ‘flips’ the position at law.

This means that where real property is gifted to two or more people in those jurisdictions it will be deemed to pass to the parties as tenants in common, in equal shares.

** for the trainspotters, the title today is riffed from the Midnight Oil song ‘Blot’. View hear (sic):

The youngest, modern-est**, most beautiful-est ... and 'wealthiest'

Previous posts have considered the distinction between owning an asset as joint tenants compared to tenants in common.

One aspect of the rules in relation to joint tenancy that can arise in tragic circumstances is where two (or more) people die in the same incident, or indeed in unrelated incidents, and it is not possible to determine the order of deaths.

In these circumstances, in all Australian states other than South Australia, there is legislation deeming the deaths to have occurred in order of oldest to youngest. This means the youngest person will be entitled to 100% of the assets formerly owned as joint tenants.

These rules apply where the court determines that the order of death is uncertain (for example, see Re Comfort; Re Tinkler; Equity Trustees Executors & Agency Co Ltd v Cameron [1947] VLR 237).

South Australia also has a unique approach (in Australia) in relation to perpetuity periods, having essentially abolished the rule against perpetuities (which is generally 80 years) and allowing trusts to potentially last indefinitely.

The decision of In the Estate of Graham William Dawson (Deceased) and Teresa Veronica Dawson (Deceased) [2016] SASC 89, arguably best summarises the position in South Australia where multiple joint tenant owners of an asset die.

While acknowledging that the law in this area has essentially been ‘frozen’ for over 100 years, the court held that the existing rules continued to apply because no legislation had been introduced in South Australia changing the position. This meant the assets owned as joint tenants passed undivided into the respective estates for the 2 owners.

Interestingly, again due to legislation in states other than South Australia, companies can also own assets with other parties as a joint tenant.

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 Silverchair song ‘Young modern station’. View hear (sic): 

Death (to our friends) ** duty and joint tenancy

For many years in Australia, one of the most popular tax planning tools to manage death duties involved assets being held as joint tenants, instead of tenants in common.

Previous posts have the distinction between these two ownership structures. As usual, please contact me if you would like access to this content.

A surviving joint tenant receives the asset automatically (without anything passing via the deceased owner's estate). Joint tenancy ownership was often seen as the easiest way to delay the imposition of a death duty for as long as possible.

In jurisdictions that still have death duties, this ownership structure can provide a pathway to manage the tax impost.

Interestingly, under Australian law, the strategy can still provide planning opportunities.

In particular, where an asset is owned as joint tenants with a non-resident, the tax that would otherwise be paid by a non-resident on the death of a co-owner under capital gains tax (CGT) event K3 can potentially be avoided if the relevant asset is owned as a joint tenancy. This is because CGT event K3 is only triggered where assets actually pass via an estate.

It is important to note that in recent years the federal government moved to close this potential 'loophole'. At this stage however, no such changes have occurred.

** for the trainspotters, the title here is riffed from a Sonic Youth tune ‘Death to our friends’.

Unilateral severance** of joint tenancy assets

Last week’s post mentioned in passing the ability to unilaterally sever a joint tenancy.

Interestingly, there are in fact 6 ways to sever ownership of a property owned as joint tenants, namely:

1. an agreement to sever is reached between all parties (this is arguably the most common approach);
2. by mutual intention, as demonstrated by the conduct of the parties (relatively difficult to prove);
3. by court order;
4. due to the bankruptcy of a party (as explored in previous posts);
5. due to the homicide committed by one joint tenant against another (fortunately, relatively rare); and
6. a joint tenant unilaterally severs the tenancy.

It is also important to as mentioned last week, 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. Previous posts have explored this aspect of the rules.

The ability to unilaterally sever a jointly owned property is enshrined in state-based legislation that permits any person who owns a property as a joint tenant to notify all other owners of their intention to sever the joint tenancy and for the registration of that severance to take place without the prior approval of the other owners.

If there are more than two owners of a property and only one owner wishes to sever the joint tenancy, the other owners will still hold their reduced interest in the property as joint tenants.

The legislative provisions in this regard generally require that the other joint tenants be notified by the Titles Office Registrar.

The Registrar may also require the full details of the other joint tenants and a statement by the party seeking to sever that they are unaware of any limitation on their right to do so.

For tax purposes, assets owned via a joint tenancy are deemed to be owned as tenants in common, in equal shares. This means that the conversion from one ownership mode to the other has no tax consequences. It also means that the death of a joint tenant owner will cause a tax event.

For example, on the death of one of two joint tenant owners of a pre-capital gains tax property, converting the ‘notional’ half share of the deceased owner into a post CGT asset (with a market value as at the date of death).

Similarly, there are stamp duty concessions for the conversion.

These conclusions in relation to the legal ability to convert the ownership structure without any tax or stamp duty consequences are however predicated on the basis that each owner will retain their deemed proportionate share in the asset.

In other words, if there are two owners, then they must each have a 50% share as tenants in common, if there are three owners, they must each have a one third share etc.

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

** for the trainspotters, the title here is riffed from a Nick Cave and the Bad Seeds tune ‘The Ballad of Robert Moore and Betty Coltrane’

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’.

Changes** and ownership structures and the bankruptcy rules

Recent posts have looked at various aspects of the bankruptcy regime in relation to jointly owned assets.

As set out in last week's post, from an asset protection perspective, it is generally preferable to own assets with other parties on a tenants in common basis, so that if a co-owner dies, their interest can be distributed to a testamentary trust.

Arguably the leading case in this area is Peldan v Anderson [2006] HCA 48.

As usual, if you would like a copy of the case please contact me.

In this case, the wife as one of the co-owners of a house, who was in no financial difficulty, was diagnosed with an illness that meant she did not have long to live.

Driven largely by asset protection objectives, given the husband’s financial difficulties, the two owners decided to change the ownership structure of the property from joint tenants to tenants in common.

This meant that the husband as co-owner who was also at risk would not receive 100% of the property automatically on the death of his wife, rather her 50% would pass via a will, which was structured to include a testamentary trust.

The High Court held that this change in ownership was not a transaction that was void against the trustee in bankruptcy and therefore only the husband’s 50% interest was exposed to his creditors.

** for the trainspotters, the title here is riffed from the David Bowie song ‘Changes’.

Joint tenancy and asset protection**

Generally, from an asset protection perspective, it is preferable to own an asset such as a house jointly with someone as a tenant in common, as opposed to joint tenants.

This is because if one party passes away, their ownership interest then can be directed to a testamentary trust under their will, effectively protecting that share of the property.

In contrast, if the asset was owned as joint tenants and the owner with the low risk profile passes away, the at-risk owner would then automatically have 100% of the property in their name.

For tax purposes, it is important to note that assets owned via a joint tenancy are deemed to be owned as tenants in common, in equal shares.

This means that the conversion from one ownership mode to the other has no tax consequences.

It also means that the death of a joint tenant owner will cause a tax event.

For example, on the death of one of two joint tenant owners of a pre-capital gains tax (CGT) property, the ‘notional’ half share of the deceased owner is converted into a post CGT asset (with a market value as at the date of death).

One of the leading cases in the area will be summarised in next week's post.

** for the trainspotters, the title here is riffed from the Massive Attack song ‘Protection’.

Spinning around?** - Joint tenants and bankruptcy

Previous posts have considered the distinction between owning an asset as joint tenants compared to tenants in common, let me know if you would like access to this content.

From time to time, we have advisers, on behalf of their clients, contact us about whether there is any advantage in ensuring an asset is owned as joint tenants so as to try to prevent a trustee in bankruptcy getting access to the asset.

The argument being that because each joint tenant effectively owns an interest in the entire property, this makes it very difficult for a trustee in bankruptcy to seize the property.

The reality however is that under the Bankruptcy Act, as soon as a person who owns an asset as joint tenant with somebody else becomes bankrupt, the joint tenancy is effectively severed, so the trustee in bankruptcy can unilaterally secure their ownership of the relevant share of the property discretely.

Where a trustee in bankruptcy gains ownership of a discrete share of a property, the remaining co-owners are able to negotiate with the trustee in bankruptcy to acquire it for market value.

The trustee in bankruptcy is however not obliged to accept the offer from a co-owner, and can proceed to sell the property on the open market.

Even if the co-owner wanted to oppose such a sale, the trustee in bankruptcy can obtain court permission for a statutory sale.

Following the statutory sale, the co-owner and trustee in bankruptcy share the proceeds in accordance with their proportionate ownership interests.

** for the trainspotters, the title here is riffed from the Kylie Minogue song ‘Spinning around’.