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Wednesdays with Redchip May - Personal Insolvency

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What do you do when the house is burning? We’ve seen many advisers reach for quick-fix solutions for their clients who are facing personal insolvency, but they end up adding fuel to the fire in the long run.

In our May event, our experts look at some of the common misconceptions around bankruptcy and how to deal with it. We also provide some proactive structures and solutions that can benefit your clients when faced with insolvency.

Topics include:
- Personal insolvency misconceptions
- Insolvency related restructures
- Gift and loan back arrangements

Published in: Law
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Wednesdays with Redchip May - Personal Insolvency

  1. 1. Wednesdays With Redchip WELCOMETO
  2. 2. Common traps for the prospective bankrupt REBECCA FORSYTH RebeccaF@redchip.com.au
  3. 3. What is bankruptcy? • A bankruptcy trustee is appointed to take control of a person’s affairs • Can be voluntary or initiated by creditors • The trustee has wide ranging powers allowing them to investigate the bankrupt’s affairs and unwind past transactions Slide 3
  4. 4. Beware the “easy way out” • Many strategies marketed to people in financial distress that promise to keep their assets away from creditors • We see a huge variance in how successful those attempts are Slide 4
  5. 5. I can just transfer the house to my wife before I go bankrupt… Slide 5
  6. 6. Not unless she pays for it • Transfers of assets for less than market value can be voidable • Love and affection =/= market value • $250,000 =/= market value for a home worth $500k • Other examples: buying an asset for more than it’s worth, granting a mortgage to secure a past loan Slide 6
  7. 7. I already owe mum $400k. If she forgives the loan, I can transfer the house to her… Slide 7
  8. 8. Only if you can repay the loan • A borrower can transfer assets in exchange for a debt being forgiven, if value of forgiveness = market value of the asset • But what is the value of that consideration? • You might think that $400k debt = $400k house • If the borrower is insolvent, or if debt could never be recovered, is it really worth as much as a $400k house? Slide 8
  9. 9. We bought the house in my husband’s name… Slide 9
  10. 10. Fine, unless you paid for it • A trustee can enforce a bankrupt’s equitable interests, including constructive/resulting trusts • The name on the title does not always reflect the contributions to the property • Contributions can be payment of a deposit, mortgage repayments, rates, insurance • Domestic contributions are also recognised Slide 10
  11. 11. I can just put all that money into super… Slide 11
  12. 12. Not necessarily • The contents of your super fund are usually safe from creditors • However, contributions to super can be unwound if the main purpose was to keep money out of creditors’ hands • Large or out of character contributions are especially vulnerable Slide 12
  13. 13. Gift & Loan Back Arrangements & Asset Protection TRUNGVU TrungV@redchip.com.au
  14. 14. Gift and loan back arrangements Slide 14 • Who knows how it works? • What is your understanding? • What we trying to achieve:
  15. 15. Gift Loan Low Risk Party Clawback period – section 120 Security ? ? ? ? ? Slide 15 Defeat creditors – section 121? What is your understanding?
  16. 16. Assets At risk person Low risk Trust owns Step One Equity in asset gifted to Trust Step Two Gift is secured by credit agreement and registered security e.g. mortgage over real property PPSR over shares Registered Security protects equity Gift and loan back diagram Slide 16
  17. 17. Slide 17 • Structure correctly at the beginning! • Asset transfer ▪ Is there market value consideration? ▪ Where did that consideration go? What is the alternative?
  18. 18. Slide 18 • If no/under market value consideration: ▪ Claw back period – section 120 ▪ Defeat creditors – section 121 ▪ Stamp duty ▪ CGT What is the alternative?
  19. 19. Dirty word or not? Slide 19 ASSET PROTECTION
  20. 20. Slide 20 What is … asset protection? Cheap suit v Body of armour Who can make a claim against our clients?
  21. 21. There’s trouble - who gets paid first Employee Suppliers Landlord Australia Taxation Office Other ? ? ? ? ? Slide 21
  22. 22. Slide 22 Who has the most resources to enforce a claim? ATO Part IVA
  23. 23. Part IVA Slide 23 Hart v Commissioner ofTaxation [2018] FCAFC 61 237… If a tax benefit was not in reality the sole purpose, it was so dominant that any other purpose, such as asset protection, pales into insignificance
  24. 24. LCR 2016/3 (small business restructures) Slide 24 Example 1: Asset protection 18. After being sued by a client for negligent financial advice, Mark has decided he is not prepared to conduct his business on his own account.
  25. 25. Slide 25 Make sure there is a real risk! = Asset Protection
  26. 26. Protecting retained profits Slide 26 Dividend Family Trust Bucket Co Trade Co Pty Ltd Distribution of Dividend Loan & PPSR Family Trust
  27. 27. Wednesdays With Redchip THANKS FOR ATTENDING

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