In this edition of ‘It depends’, senior associate Keeghan Silcock talks about whether gift and loan back arrangements are effective.
Keeghan, along with partner Clinton Jackson, will be presenting on this topic at our Annual Adviser Conference on 23 and 24 March 2023. Register now to attend in person or online.
Hi and welcome to another edition of It Depends. Today I’ll be talking about whether gift and loan back arrangements are effective.
What is a gift and loan back arrangement?
So, a gift and loan back arrangement involves an individual gifting an amount of money to a related lower risk entity, usually a discretionary trust. That entity will then lend the same amount of money back to that same individual and take security over one or more assets of that individual for the loan.
What are the benefits of a gift and loan back arrangement?
So, the benefits of a gift and loan back arrangement include that it’s really an asset planning strategy. What we have is an individual who’s typically high risk, so potentially a business owner or a doctor or a lawyer, and they’re wanting to protect assets that they own in their own individual name, using a related entity structure, without actually transferring ownership of the asset to that structure. By implementing a gift and loan back arrangement, we are effectively transferring the available equity that the individual holds in that asset to a related structure, without incurring transactional costs. So, if we look at main residence, for example, if an individual were to actually transfer ownership of that main residence to a trust or another related entity, then there could or probably would be duty payable on that transfer. There would also be other tax consequences. So, the CGT main residence exemption, for example, that applies to main residences would be lost once it’s in that related trust structure and the individual might also lose land tax concessions that apply while they are the owner of that asset rather than the trust.
Is a gift and loan back arrangement effective?
So, it depends. Whether a gift and loan back arrangement is effective will ultimately come down to how it is implemented. There have been a number of recent court decisions which have challenged the effectiveness of gift and loan back arrangements in particular circumstances. So, most recently we had a decision last year in the Queensland Supreme Court of Re Permewan (No 2), and in that decision a gift and loan back arrangement was invalidated by the Court because the transaction was implemented number one, using what’s called a promissory note. A promissory note involves the individual gifting the amount of money to a related entity, using a document that specially prepared promising to pay that amount to the entity rather than actually cash flowing that transaction using money. And in Re Permewan (No 2), the way that that promissory note was prepared didn’t satisfy the technical requirements of the Bills of Exchange Act. However, the Court also made a number of comments suggesting that even if those technical requirements had been satisfied, the transaction would have been invalidated. They suggested that a gift and loan back arrangement may not stand on the grounds that it’s enforceable due to public policy, or potentially because it’s a sham. Following on from Re Permewan (No 2) and other court cases which have raised similar issues, it is really important firstly that the arrangement is implemented using cash. It’s going to be very high risk if a promissory note is used. And it is also very important that any documents prepared in respect of the arrangement are done properly, satisfy all your technical requirements, signed properly and where appropriate, registered.
How can I learn more?
If you would like to learn more about a gift and loan back arrangement, whether it’s effective, useful for your clients, then we encourage you to come along to our annual advisor conference, which will be happening on 23 and 24 March 2023. Clinton Jackson and I will be presenting on the issue of gift and loan back arrangements. So, please book your ticket. We’d love to see you there either in person or online.