Another attack on the family home…
A tried-and-tested asset protection strategy used by businesses and its professionals is to put the family home into the spouse’s name to protect it from creditors and therefore a bankruptcy trustee. This strategy’s effectiveness was recently tested by the Australian Taxation Office (ATO) in the decision of Commissioner of Taxation v Bosanac (No 7)  FCA 249 (22 March 2021) (McKerracher J). For the sake of this article, let’s call it “the Bosanac case”.
We published a punchy article on the impact of bankruptcy upon the family home (click here). As Scott Andersen of our Geelong office explained, under section 58 of the Bankruptcy Act 1966, a person’s property upon becoming a bankrupt, including the family home, vests in the bankruptcy trustee. To recover property for creditor’s benefit, the bankruptcy trustee will consider section 116 of the Bankruptcy Act that provides limits on what property the bankrupt holds may be divisible among creditors. When it comes to real property, the “doctrine of exoneration” must also be considered.
Broadly speaking, the doctrine of exoneration principle changes a person’s interest in real property ownership, depending on the conduct of one or more of its owners. This can substantially impact the amount a bankruptcy can recover particularly where, despite a bankrupt being a registered owner of real property with equity, they have no interest in that equity because they borrowed additional funds against the property.
Commonly the family home is used as security to fund a business’s working capital. If one of the co-owners operates the business, then the non-business-related co-owners may argue that the doctrine of exoneration applies as the now bankrupt co-owner used some/all of their equity in the property for the business.
This doctrine and various other “presumptions” were tested in the Bosanac case. Let’s broadly look at the facts:
- Mr and Ms Bosanac were married in 1998.
- Mr Bosanac claimed to be a ‘self-styled venture capitalist’.
- In May 2006, Ms Bosanac made a successful offer to purchase a property in Perth, Western Australia for $4,500,000. She paid a $250,000 deposit from a joint bank account held with Mr Bosanac.
- In November 2006, the property sale settled and title to the property was transferred into the name of Ms Bosanac as the sole proprietor.
- The property became Mr and Ms Bosanac and their three children’s home.
- The purchase price was fully funded by two new joint loans from Westpac Bank: one of $3,500,000, the other of $1,000,000. The loans were secured over the Perth property and other property they jointly owned.
- In mid-2015 Mr Bosanac moved out (they had formally separated some time in 2013).
- Around this time, the Commissioner of Taxation audited Mr Bosanac’s financial affairs and discovered that he hadn’t lodged tax returns from 2006 to 2013.
- On 12 August 2016, the Federal Court entered judgment for a tax debt of $9,344,111.89 plus costs against Mr Bosanac.
What’s interesting about this particular case is that the wife was the sole registered proprietor of the family home. Irrespective of this, the Commissioner attempted to enforce the judgment against the Perth home.
The Commissioner essentially argued a “presumption of resulting trust” where Mr Bosanac had a 50% beneficial interest in the home. Ms Bosanac relied on the “presumption of advancement”, successfully claimed a 100% beneficial interest in the home. So, what are the presumptions and what do they mean?
Presumption of resulting trust
A “presumption of resulting trust” can arise when a person purchases property in the name of another, or in their joint names but the other person contributes none of the purchase money or is contributed by two people jointly, but the property is registered in the name of only one person.
Without evidence to the contrary, a resulting trust may arise because “it is presumed that the person who contributed to the payment of the purchase price did not intend to gift their contribution to the other person”.
Presumption of advancement
The law has historically recognised that in certain relationships, such as marriage, it is presumed that the husband intended to gift the property to his wife (also known as “the presumption of advancement”). Unfortunately, this presumption is archaic as it precludes females gifting to the male in a marriage; excludes de facto partners and same sex marriages.
The Commissioner argued in the Bosanac case that the presumption of advancement does not apply to a matrimonial home; and was rebutted by evidence of the husband’s intention when purchasing the property.
The Commissioner’s arguments
- The Commissioner claimed it would make little sense as a co-borrower to owe a substantial debt if Mr Bosanac didn’t intend to retain his beneficial interest.
- Mr and Ms Bosanac took out two other loans, secured by the Perth property’s mortgage, which Mr Bosanac used to trade his shares.
- Mr and Ms Bosanac shared bank accounts and other property assets. It follows the same approach to ownership that would extend to the family home.
The Court’s findings
- The presumption of advancement can apply to the matrimonial home.
- The fact that Mr Bosanac incurred a substantial loan debt did not conclusively show he intended to retain a beneficial interest. Where a bank requires two signatures, the person seeking to rebut the presumption of advancement is burdened to show that the other person’s signature was merely a formality as opposed to evidence of an intention to confer a beneficial interest on that person.
- Although the loan Mr Bosanac used for share trading was secured by the property, Ms Bosanac explained she had no issue with this because she trusted her husband. This loan was also secured by a separate property where Ms Bosanac was the sole registered proprietor.
- The Court observed that Ms Bosanac’s registration as sole owner may have been made for many reasons but the evidence as to the intent of either party was very scant. Ultimately, the Court held that the Commissioner had not provided sufficient evidence of Mr Bosanac’s intention to retain a beneficial interest in the property.
- Although the Bosanac case involves a creditor claim (the ATO), the issues apply to bankruptcy scenarios where a co-owner is bankrupt and the bankruptcy trustee may be claiming an entitlement to the property. In the Bosanac case, the property was acquired several years earlier and no evidence suggested that the property title’s transfer was to prevent, hinder or delay the property being available to Mr Bosanac’s creditors.
- To improve the wife’s ability—I’m sorry to perpetuate the gender role bias here—to rely on the presumption of advancement, it may be worth considering using a deed to confirm the husband has gifted the property to his wife; has no beneficial interest in the property; and, if a joint borrower on the purchase loan, that he has no rights of contribution against the wife in respect of the loan and mortgage.
- It may also assist if their affairs are organised so that mortgage payments are paid from the wife’s income.
In conclusion, it looks to be that the Bosanac’s case has highlighted that the presumption of advancement still remains an effective asset protection strategy provided that there is no evidence to suggest that the husband retains a beneficial interest in the property or has done so with the intention of defeating creditors’ claims.