Federal Court Tax Ruling Shock: Your spouse may no longer be able to protect your family home

This article was first published by the Medical Republic on 16th November 2021.

The latest Federal Tax Court case is a sobering reminder you and your spouse cannot take asset protection for granted. You are not entitled to financial security. you have to work to protect it.

Protecting the family home should always be at the forefront of one’s mind. This ruling may have serious implications for doctors or healthcare professionals and practice owners.

It is very common for people to transfer assets to a spouse (or family trust) before embarking on a “risky” activity. For example, before going into practice, becoming a partner in a medical or healthcare practice or undertaking a “risky” development.

Back in the 1990’s pharma companies would have me present nationally to packed out audiences. Often the local venue organisers would ask me why I was so popular.

I would joke that: “I teach people how to Make it, Keep it and Hide it!”

How to Make Money in healthcare, Keep it from the tax office and Hide your money from people who wanted to sue you.

The basic principles remain the same, however, there are some recent big BUT’s!

In these COVID times, healthcare professionals and their owners have been forced to undertake higher than usual risks. These include and are not limited to:

A COVID19 practice outbreak causing the practice to shut down and quarantine all staff for 14 days for a costly deep clean; and or

State or Federal government multi-million dollar plus contractor payroll or income tax audits due to recent case decisions found not in favour or practices or a sharp increase in interest rates.

A single significant adverse event could potentially destroy the livelihoods and life savings of frontline workers and their owners. Unfortunately, these new threats are real especially if you carry a lot of personal or business debt.

The family home exposed and more? 

Unwittingly, you may have placed your family home at risk when your accountant said to put the house in the spouse’s name. This latest court case sheds new light on how something that appears so simple can go so horribly wrong.

In the Commissioner of Taxation v Bosanac [2021] FCAFC 158 tax case, the court made a judgment against the taxpayer for unpaid taxes. It established holding a $4.5 million property acquired in the name of one spouse (despite being divorced) was jointly owned 50/50. The tax office could recover the debt by attacking the family home that was not in the taxpayer’s name.

Mr and Ms Bosanac had initially jointly 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 to acquire the property in Dalkeith, Australia. The property was then used as collateral to acquire other investment assets like shares.

The Full Federal Court said, “on the objective facts… the spouse Ms Bosanac held 50 per cent of the property on trust for Mr Bosanac.”

The Full Court of the Federal Court judge held that the property was jointly owned thereby “enabling the Commissioner of Taxation to make a claim on the property for unpaid taxes” incurred by Mr Bosanac.

Trying to avoid paying your debts is not a recommended strategy, however…

At one extreme, you have people who go into business, rack up large loans, then dump their businesses with little exposure to their ‘personal’ finances. They use ‘legal structures’ and ‘property transfers’ to avoid taking responsibility for their actions: leaving the small creditors and the tax office to foot the bill.

On the other end, you have people who have transferred the property to a spouse or trust well before going into business or incurring any liabilities.

They have correctly structured and financed their business, and have just been down on their luck.

You should be able to choose how much risk when you go into business or undertake a speculative investment. Appropriate risk for reward is the basis of our financial system. It promotes innovation and progress. Supporting beneficial risk-taking that is not reckless should be admired and not shunned.

On the contrary, unlimited liability could be seen to do more harm. Creditors do need to take some responsibility when offering credit.

Deliberately incurring debt without any intention of paying it, should not be condoned. Nor should you have to lose your house if you have taken the right steps due to an unforeseeable event.

The law supports this view to a scary point…

Sackville J in Prentice v Cummins (2002) 124 FCR 67 states at :

“I am prepared to assume for the purposes of this case, without deciding, that if all that is known is that a professional person:

  • transfers the bulk of his or her assets to a family member for no consideration;
  • has no creditors at the time of the transfer (or retains assets sufficient to meet all liabilities known at that time);

  • is not engaged and does not propose to engage in any hazardous financial ventures; and

  • intends to protect the transferred assets from any action brought by a client who might in the future sue for professional negligence (there being no such suit in the offing at the time of the transfer),

then s121(1) of the Bankruptcy Act does not render the transfer void against the person’s trustee in bankruptcy.”

The accountant who lost his family home

Despite Sackville’s view, in recent times this no longer appears to as clear cut.

The Federal Court decision of Turner (As Trustee of Bankrupt Estate of Wallace) v Wallace [2016] FCCA 963 (Wallace Case) suggests that transferring an asset to a spouse may not be an effective strategy in some circumstances.

Mr Wallace was an accountant, when he transferred the family home, just before he invested in a failed car detailing business, it was held he had intended to defeat creditors. Accordingly, 10 years later when the business failed his interest in the family home was deemed to be available to pay unsecured creditors.

Protecting the family home and your wealth

The recent decision may come as a surprise to many lawyers and accountants. How can you protect your home (or other assets)?

We have 14 tips that may help you that you should raise with your legal and accounting adviser.

New Mandatory Director Identification Laws

As a side note, there are new ASIC Director identification number laws. Big brother is with us. This will help data match with government agencies any entities you are a director of. Company directors can now apply for their new Director identification numbers (director ID).

Key dates are:

  • individuals who became a director on or before 31 October 2021 – must apply by 30 November 2022

  • individuals who become a director between 1 November 2021 and 4 April 2022 – must apply within 28 days of appointment, and

  • individuals who become a director from 5 April 2022 onwards – must apply before the appointment.

To apply, directors can log into ABRS online using the myGovID app and the online application is likely to be the fastest channel, with director IDs issued instantly. It is free to apply and available to directors within Australia and overseas. Applications are available by phone and by paper, for those who need them.

 

Further information about the MBR program and director IDs can be found at the Australian Business Registry Services (ABRS) website.

To obtain a better understanding click here for your Protecting the family home and your wealth checklist to find out what steps you need to take. Consult your accounting and legal advisers first. It is advisable to do this before you comply with the new Mandatory Director Identification Laws. 

For more insights visit our blog.

About me: David Dahm BA (Acc.), CA., FCPA, CTA, FFin, CPM, FAAPM, FAIM, FGLF.

Chartered Accountant, Chartered Tax Adviser, Registered Tax Agent, Former AGPAL Surveyor 10 years of service

David Dahm is CEO and founder of the national medical and healthcare chartered accounting firm Health and Life and global Founder and CEO of the not for profit project the International Healthcare Standards and Ethics Board (www.ihseb.org)

After a serious work related car accident in 1989, and nine operations later I continue to be a patient and provider advocate. I enter my third decade as a national Chartered Accountant for Medical and Healthcare practices in Australia. I am a former 10-year Australian General Practice Accreditation surveyor. I come from a medico family. I have served on the AAPM national Board and was the inaugural national Chair of the Certified Practice Manager CPM post nominal. I continue to provide accounting tax and practice management advice to many practices all over Australia.

You know who you are and I thank you for this real honour and privilege to serve you and your community through you. Note, I am not a lawyer please seek appropriate legal and accounting advice. This information is for general information and discussion only.

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