When too much asset protection (ain't) enough**

Previous View posts have explored aspects of the asset protection strategy often referred to as a 'gift and loan back' arrangement.

The arrangement (and various iterations of it) has arguably had a chequered history, and often seen branding developed to conveniently label the steps involved, for example:

1. Beta Strategy (which was the subject of a failed patent application in the case of Grant v Commissioner of Patents [2006] FCAFC 120);
2. Legacy Protection Strategy;
3. Secured loan arrangement;
4. Synthetic transfer;
5. Capital protection strategy using a lineal descendent or bloodline trust;
6. 100% security strategy - to protect your assets from thieves such as the tax man (see Ed Burton and his 'Diamond Inner Circle Coaching and Mastermind Alliance' as part of the 'Vital Link Financial Education' Group circa 2004).

In late 2022, another productised version of the arrangement gained the attention of the Tax Office in their release labelled QC 71175 (22 December 2022).

Branded as the 'Vestey Trust' or the 'Master Wealth Control Package', the arrangement is promoted as part of a wider property and investment offering that promises advice on 'how to locate and invest in undervalued property, undertaking property developments, locating undervalued businesses, renovating for profit and how to secure and grow your wealth' by the 'DG Institute', founded by Dominique Grubisa.

As with all the various versions, or brands, of a gift and loan back arrangement, the key components appear to be driven by managing asset protection that would be otherwise problematic due to related tax and stamp duty asset transfer costs.

That is, in broad terms, the owner of an asset gifts an amount equal to their equity in the asset to a family trust (or low risk spouse). The family trust then lends an amount of money to the owner and takes a secured mortgage over the property or registers a security interest on the Personal Property Securities Register over the personal assets of the individual the protection is intended for.

Implemented correctly, the gift and loan back approach ensures there are no CGT or stamp duty consequences to achieving asset protection, subject to the claw back rules under the bankruptcy regime and various state based property or conveyancing acts.

The integrity of the particular strategy promoted by DG Institute has been subject to attention in mass media for some years, for example Richard Baker in The Sydney Morning Herald in 2020 identified that the promoters were claiming that "If you have superannuation, you want to protect that now. The current laws say that’s already protected. But in a grab for cash and a time of crisis like this where the government is supporting the whole nation for an indefinite period, that is a big pool of money that is up for grabs and they have the power to enact laws to take that. We want to protect it now".

The articles also pointed out that:

1. there was nothing to indicate superannuation laws would be changed to see assets exposed to financial misadventure;
2. the organisation instructed 'students' of the courses to buy property from people identified in Family Court proceedings as divorcing or financially struggling (ie to secure properties from distressed vendors);
3. Dominique Grubisa engaged her parents in property and financial deals even though both were struck off the NSW solicitor’s roll in 2013 for fraud.

Similarly, in December 2022, the ACCC commenced proceedings in the Federal Court against Master Wealth Control Pty Limited, trading as DG Institute, for allegedly making false or misleading representations, including in relation to the Master Wealth Control program DG Institute offered to consumers, in breach of the Australian Consumer Law.

The ACCC alleges DG Institute also made false or misleading representations in the delivery of the Master Wealth Control program and that by setting up a ‘Vestey Trust’, using a suite of documentation provided by DG Institute said to be legally binding, any assets in the trust would be completely protected from creditors. DG Institute said the Vestey Trust was “bulletproof”, “impenetrable” and would result in students being "unable to be effectively pinned down by creditors".

The ACCC alleges that this was misleading as the Vestey Trust did not provide that complete protection.

Further, the ACCC argues that DG Institute represented that the Vestey Trust structure had been tested and upheld as effective by the Full Federal Court of Australia. The ACCC alleges that this is misleading as the referenced court judgment, Sharrment Pty Ltd v Official Trustee in Bankruptcy (1988) 82 ALR 530 (a case explored in other View posts), did not concern a Vestey Trust and does not provide authoritative precedent or support for the legitimacy or effectiveness of the Vestey Trust structure in protecting assets from creditors.

Titled 'SMSFs and schemes involving asset protection' the Tax Office confirms that as a threshold issue the arrangement is unnecessary because the superannuation system already protects SMSF assets from creditors.

This fundamentally important observation is supported with a number of further comments focused on the likely superannuation related compliance risks, for example that the arrangement may:

1. result in the giving of a ‘charge’ over, or in relation to, a fund asset by the SMSF trustee;
2. involve the ‘borrowing’ of money by the SMSF trustee;
3. expose fund assets to unnecessary risk if it is unclear who owns them;
4. cause the fund to be maintained in a way that doesn’t comply with the sole purpose test;
5. cause SMSF money to be used for costs related to asset protection arrangements entered into by members to protect their personal or business assets; which is prohibited because these expenses are not incurred in running the SMSF.

Based on publicly available information there is no doubt that each of the concerns set out by the Tax Office are correct and likely to be applicable to any gift and loan back arrangement involving an SMSF.

For arrangements not involving SMSFs, despite the case featured in the previous article (namely Re Permewan No 2 [2022] QSC 114), appropriately implemented gift and loan back arrangements appear to be a valid and revenue effective asset protection strategy. This said, there are a myriad of potential issues that always need to be considered, for example:

1. care should always be taken to ensure that the trust which will make the secured loan does not itself conduct risky activities (for example, run a business).
2. while the arrangement can be entered into without registering a mortgage, if this step is not taken, the trust that has made the loan will simply be an unsecured creditor.
3. the impact of the arrangement in relation to potentially accessing the small business tax concessions should always be carefully considered, because while a family home should be excluded from the $6 million test, a secured loan will generally be included if the trust is an affiliate or ‘connected entity’ under the Tax Act (which will typically be the case).
4. to the extent that a third party financier already has a mortgage over the property, they will generally require a deed of priority securing that lending (to whatever level it may be from time to time) as a first priority before the trust's second mortgage.
5. the provisions of the Tax Act under subdivision EA need to be considered. While there has been some significant dilution of the circumstances where subdivision EA will apply given the Tax Office’s approach to UPEs, in some situations it remains potentially relevant. In particular, the second 'tranche' of the gift and loan back arrangement involving a loan out of a trust can be problematic if at the time the loan is made, there was an unpaid distribution to a corporate beneficiary.

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

PS: the image today is of a random truck I happened to spy while working on the full article.

** For the trainspotters, the title today riffed from the Jimmy Barnes song 'Too much ain't enough love'.

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Final post for 2022 - Simply have a wonderful Christmas Time **

With the annual leave season starting in earnest over the next couple of weeks and many advisers taking either extended leave or alternatively taking the opportunity to catch up on things not progressed during the calendar year, last week’s post will be the final one until early 2023.

Similarly, the social media contributions by both View and Matthew will also largely take a hiatus until the New Year as from today.

Thank you to all of those advisers who have read, and particularly those that have taken the time to provide feedback in relation to the posts.

Additional thanks also to those who have purchased the ‘Inside Stories – the consolidated book of posts’ (see - https://viewlegal.com.au/product/inside-stories-reference-guide/).

The 2022 edition of this book, containing all posts over the last year, edited to ensure every post is current, indexed and organised into chapters for each key area should be available early in 2023.

Very best wishes for Christmas and the New Year period.

** For the trainspotters, one of my favourite Christmas tunes, Paul McCartney and Simply Having a Wonderful Christmas Time’ see hear (sic):

Warranties and indemnities: don’t wanna fight**

Previous posts have considered various aspects of warranties and indemnities.

Generally, the scope of recovery and damages that may be obtained will be greater where an indemnity is provided.

This is because an indemnity is effectively a promise to either reimburse or make good relevant issues if they arise.

Furthermore, indemnities:

1. Do not require the person giving the indemnity to have actually caused the loss – in other words, regardless of how the loss arises, liability will be triggered.
2. Common law rules that normally limit the scope of liability, such as remoteness or an obligation to mitigate losses, do not apply in relation to indemnities.

In contrast, a warranty only provides a promise that certain statements are correct. Practically this means:

1. A party seeking to claim in relation to a breach of warranty must do so by seeking damages.
2. The common law principles mentioned above of remoteness and an obligation to mitigate potential losses do apply.

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 Alabama Shakes song ‘Don’t wanna fight’.

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(out of) ‘Control’** of family trusts

Under the capital gains tax small business concessions, what amounts to ‘control’ of a discretionary trust is an important issue. 

In this regard, a key aspect relates to the concept of whether the trustee of a trust ‘acts, or could reasonably be expected to act, in accordance with the directions or wishes of another person or entity’.

Arguably, the leading analysis of these rules is in the case of Gutteridge v Commissioner of Taxation [2013] AATA 947.

Briefly, the case involved sale of assets by the corporate trustee of a traditional family trust (Trust).

The sole director and shareholder of the corporate trustee was Ms McKenzie, who also controlled another company (Company).

The principal of the Trust was as third party professional adviser to the family (Mr Coffey), who provided evidence that he would always follow any directions from Ms McKenzie’s father (Mr Gutteridge) including, if necessary, removing a trustee from that role. In turn Mr Coffey confirmed he would disregard any instructions from Ms McKenzie that were contrary to those provided by Mr Gutteridge.

The Tax Office denied access to the small business concessions on the basis that Ms McKenzie controlled both the Trust and Company.

The court held however that the Trust ultimately acted in accordance with the directions of Mr Gutteridge and therefore Ms McKenzie did not control it.

The Trust was therefore able to access the small business concessions.

The case ultimately reinforces that the rules are highly dependent upon the factual matrix of each 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 of today's post is riffed from the Chemical Brothers song 'Out of control’.

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Oral contracts: don’t prove me wrong, they are not worth the paper they are written on**

A Wikipedia search confirms what most learn at some stage during schooling; that is a contract is an agreement that meets certain criteria to make it enforceable at law.

In summary, the 4 key aspects of a valid contract are:

1. offer and acceptance;
2. all key terms agreed;
3. the intention of the parties to be bound; and
4. consideration exchanged.

Whether a contract exists when parties communicate in writing is sometimes difficult.

If the communication to form the (alleged) contract is verbal, the issues tend to become even more blurred. Often trying to prove the existence and terms of an oral contract become a game of ''he said; she said'' - itself a sure fire approach to generating legal fees.

It is perhaps for these reasons that, at least in relation to contracts involving land, each state has rules requiring that the terms of the agreement be documented in writing, for example:

Contracts for Sale of Land to be in Writing

No action may be brought upon any contract for the sale or other disposition of land or any interest in land unless the contract upon which such action is brought, or some memorandum or note of the contract, is in writing, and signed by the party to be charged, or by some person by the party lawfully authorised.

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 Jebediah song 'Nothing lasts forever’.

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Does a scribble** amount to the acknowledgment of a debt?

Following on from last week’s post, a further issue that often arises in the context of division 7A is whether the accounts of a debtor company can be enough to create an acknowledgement by a debtor.

In the case mentioned in last week’s post (VL Finance Pty Ltd v Legudi [2003] VSC 57), an argument that the annual company return of the creditor company was sufficient to create the relevant acknowledgment was rejected even though the returns were signed by the directors who were debtors and when read with the accounts identified the debts.

A key issue in this regard was the fact that the annual return was not a statement 'made' by the directors in their capacity as debtors 'to' the company in its capacity as the creditor.

Instead, the annual return was simply a statement 'by' the company.

In contrast however, the case of Lonsdale Sand & Metal v FCT 38 ATR 384, a statement in the accounts of a debtor company was accepted as being sufficient to amount to an acknowledgement by a debtor.

Despite the decision in Lonsdale, the better argument appears to be that the financial statements of a creditor company cannot, without more, create a valid acknowledgement by a debtor company via its directors, even if those directors sign the financial statements.

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 Underworld song 'Scribble’.

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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: