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

1. Wednesdays With Redchip
WELCOMETO

2. Common traps for the
prospective bankrupt
REBECCA FORSYTH
RebeccaF@redchip.com.au

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. 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. I can just transfer the house to my wife
before I go bankrupt…
Slide 5

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. I already owe mum $400k. If she forgives
the loan, I can transfer the house to her…
Slide 7

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. We bought the house in my
husband’s name…
Slide 9

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. I can just put all that money into super…
Slide 11

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. Gift & Loan Back
Arrangements
& Asset Protection
TRUNGVU
TrungV@redchip.com.au

14. Gift and loan back arrangements
Slide 14
• Who knows how it works?
• What is your understanding?
• What we trying to achieve:

15. Gift
Loan
Low Risk Party
Clawback period – section 120
Security
?
?
?
?
?
Slide 15
Defeat creditors – section 121?
What is your understanding?

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. Slide 17
• Structure correctly at the beginning!
• Asset transfer
▪ Is there market value consideration?
▪ Where did that consideration go?
What is the alternative?

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. Dirty word or not?
Slide 19
ASSET PROTECTION

20. Slide 20
What is … asset protection?
Cheap suit v Body of armour
Who can make a claim against our
clients?

21. There’s trouble - who gets paid first
Employee
Suppliers
Landlord
Australia Taxation Office
Other
?
?
?
?
?
Slide 21

22. Slide 22
Who has the most resources to enforce a
claim?
ATO
Part IVA

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. 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. Slide 25
Make sure there is a real risk!
=
Asset Protection

26. Protecting retained profits
Slide 26
Dividend
Family
Trust
Bucket Co
Trade Co
Pty Ltd
Distribution
of Dividend
Loan
&
PPSR
Family
Trust

27. Wednesdays With Redchip
THANKS FOR ATTENDING