For decades we accountants have told our clients that their main asset which is usually their home should be owned by the spouse with the least risk. This usually also equated to the spouse with a lower income.
Now when I say ‘We’ it does include me although I never really pushed it, nor charged for it. In fact, I do not believe I have many, if any, clients who have done this. But I know entire accounting firms who make a living out of asset protection, and this is the cornerstone of their advice.
The idea is that the one at risk of being sued would not have a share of the family home. If any legal action was taken, they could state that they do not owe the family home, so it was protected.
But that has now changed. A few weeks ago, I sent you an article about a court case when this protection scheme was being challenged. In that case, the person being sued won but in this latest case, the tables have turned. And it’s not good news for you. It may not be good news for your accountant either.
The latest case was brought by the ATO claiming they should have access to the family home which was owned by the taxpayer’s spouse. And they won.
The case relates to Mr and Ms Bosanac, who purchased a home in 2006. They paid a $250,000 deposit with funds from a pre-existing joint loan account in their joint names and borrowed the remainder. The property was then used as collateral to acquire other investment assets.
They contributed to the purchase price equally. The property was transferred to Ms Bosanac as the sole registered proprietor. Both Mr Bosanac and Ms Bosanac lived in the property until their separation in 2015, after which Ms Bosanac resided there alone.
The Bosanacs borrowed further money secured by the mortgage, which was then used by Mr Bosanac to conduct share trading.
The ATO argued Mrs Bosanac legally owned the home but 50% of that was held in trust for Mr Bosanac and the court agreed.
So, what does this mean? Well, accountants will say that when the advice was given and you paid them $$$ in fees, the advice was correct. But that may not help you now.
You may think this is unfair. But here is the logic and an example.
You have some spare cash. You find a financial planner who is willing to invest it and they do but they are not very good. As a result, your $500,000 savings are lost.
You decide to sue. You find out the financial planner lives in a house valued at $4m and owns a few boats. He drives an Aston Martin too. But you or regulators cannot get your money back because the home, the boat and the Aston is owned by the financial planner’s wife although the Planner paid for most, if not all, of it.
And, as she has not done anything wrong it means the planner can stick two fingers up in your direction, continue sleeping in a soft bed, enjoys a Sunday ride on the river and continue to have wind in his hair from the Aston you probably paid for.
See the problem?
The new court ruling means that if the planner used his earnings and gifted them to his wife, he cannot then continue to use and benefit from them. If he does, you can claim assets that do not legally belong to him.
In other words, the Court is saying ‘we know this has been done to protect your backside, not for any other commercial reason, including one’s immense love of their soulmate.’
If that is the case for the Financial Planner, it is also going to be the case for you.
So, if you did follow your accountant and have done this what should you do?
- Don’t panic. It’s not the end of the world. Take a breath.
- If you have gifted a home and a deposit to your spouse can your spouse pay for the home’s running cost? If they can then you should ensure that they pay for everything relating to the house. I.e. they are independent of you.
- If they cannot do this, then you may need to enter into a ‘settlement arrangement’ which is a legal document (in other words you are now paying for advice on the advice you were given) which basically states you have no interest in the assets held by your spouse. But that could also cause problems later in say a financial settlement or divorce. In other words, take and pay for more advice.
Australia seems obsessed with asset protection. I am not sure why. I often feel that this fear has come about from accountants and legal advisers scaring everyone, so they pay for advice.
I, on the other hand, am practical about these things. I always ask:
- What are the real chances of you being personally sued and insurance not being able to pay for it?
- What are the chances that if you get into financially difficulties the home or assets would be protected? E.g. if you default on a bank loan they won’t give two hoots who owns the property because they probably hold personal guarantees. They are going to grab it anyway.
You see in my 12 years of being in Australia I have not yet come across a client who is being sued but has not lost their home because it was in a spouse’s name. That does not mean it won’t happen. But what are the chances it will happen to you?
Because you could have paid for advice, and now need to pay for more advice on something that will not protect you anyway. And the worse thing is the chances of someone suing you is about as likely as being able to successfully sow a jumper while having sex.
But that does not mean asset protection is not important. It is very important. All I say is, to be practical and realistic. And ask your advisors to do the same.
If you would like more information on this topic, please contact us.
