Duelling presumptions trumped by objective facts

Duelling presumptions trumped by objective facts

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Duelling presumptions trumped by objective facts

Author: Michael Morris

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4 min read

15 Nov 2022

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    Key Takeaways
  • The Commissioner of Taxation sought orders that a husband had a half interest in a property owned solely by his wife, on the basis that the presumption of resulting trust applied and the presumption of advancement did not apply.
  • The Commissioner was unsuccessful at first instance in the Federal Court, then successful on appeal in the Full Court of the Federal Court.
  • The High Court ultimately determined that the objective facts revealed the intention of the husband and wife was that the husband would not obtain any interest in the property, without the need to resort to the application of either of the “duelling presumptions” of advancement and resulting trust.

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Introduction

In 2006 Ms Bosanac purchased a residential property which became the marital home of her and Mr Bosanac. The property was registered in Ms Bosanac’s name only. The purchase money was paid from funds provided by Mr & Ms Bosanac jointly and loans obtained by them jointly. The loans were secured over the property and also other properties owned by each of Mr & Ms Bosanac in their individual names. 

In 2016, the Commissioner of Taxation obtained judgment against Mr Bosanac for over $9 million plus costs. 

In order to facilitate recovery of part of the judgment sum, the Commissioner sought a declaration that Ms Bosanac held 50% of her interest in the property on trust for Mr Bosanac. That is, that Mr Bosanac had a 50% interest in the property. 

 

The duelling presumptions 

The basis for seeking the declaration was the “presumption of resulting trust”. A resulting trust is presumed to arise where a person (here, Mr Bosanac) contributes to the purchase price for a property that is owned by another person (here, Ms Bosanac). The effect is that a trust is taken to “result” in favour of the person that contributed to the purchase price, to the extent of the contribution. Here that is 50% as the funds were provided jointly by two people. 

The presumption can be rebutted if it is proved that there was no intention on the part of the person advancing the purchase money to obtain an interest in the property. 

Another presumption that arose for consideration in the proceeding was the “presumption of advancement”. The precise nature of the “presumption” and how it operates has been variously described over time. Relevantly, it applies where a husband contributes purchase monies towards the acquisition of a property in the wife’s name. In that circumstance a “presumption” arises that the husband’s contribution is a gift to the wife such that the husband does not obtain any interest in the property. 

Where the presumption of advancement arises, it rebuts the presumption of resulting trust. 

The previous decisions 

The primary judge in the Federal Court found that the evidence did not support an inference that Mr Bosanac intended to have an interest in the property. Accordingly, the presumption of advancement was unrebutted, and that rebutted the presumption of resulting trust. 

On appeal, the Full Court of the Federal Court found that the evidence did support an inference that Mr Bosanac intended to have an interest in the property. Accordingly, the presumption of advancement was rebutted, and the presumption of resulting trust applied. 

 

The High Court’s decisions 

Ultimately the High Court found that the evidence supported an inference that the parties objectively intended Ms Bosanac to be the sole beneficial owner of the property. Consequently, there was no need to resort to either of the presumptions to determine the outcome. The appeal was allowed, with the first instance decision of the Federal Court standing.  

There was no direct evidence from either Mr or Ms Bosanac as to their intention. In this case it was a question of what inference could be drawn from the objective facts.

There were a number of factors that lead to the High Court reaching its conclusion, including the following: 

  • There was a history of Mr and Ms Bosanac holding property in their own names;
  • Consistent with that, it was “evidently” the desire of Ms Bosanac to purchase and hold the property in her name;
  • There was a history of Mr and Ms Bosanac obtaining loans jointly to fund the acquisition of an asset by one of them, and using each other’s assets as security for such loans;
  • Ms Bosanac was the “moving party” for the transaction; and
  • Mr Bosanac was a sophisticated businessman who must have appreciated the significance of the property being held in Ms Bosanac’s name.

The Commissioner also sought to have the presumption of advancement abolished. The Court declined to do so. Gageler J considered that “the weight of history is too great for a redesign of that magnitude now to be undertaken judicially”. Kiefel CJ, Gleeson, Gordon and Edelman JJ also observed that the presumption is a ”landmark”. 

 

Conclusion 

The key takeaway from the High Court’s decision is that the main focus should be to ascertain the objective intention of the parties that is borne out of the objective facts from evidence led by the plaintiff. Depending on what that objective intention is, there may be no need to resort to applying either presumption.

If you would like advice around corporate & commercial property arrangements, please contact me at michael@hillhouse.com.au or 07 3220 1144.

Areas of Expertise

Corporate & Commercial
Government
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Don’t look a gift horse in the mouth – reconsidering gift and loan back arrangements

Don’t look a gift horse in the mouth – reconsidering gift and loan back arrangements

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Don’t look a gift horse in the mouth – reconsidering gift and loan back arrangements

Author: Michael Morris

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8 min read

23 Sep 2022

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    Key Takeaways
  • A “gift and loan back” arrangement is a popular asset protection strategy that has been implemented in various forms for many years.
  • However, a recent decision of the Supreme Court of Queensland has cast a shadow on the efficacy of such an arrangement.
  • In some circumstances it should still be possible to implement an effective gift and loan back arrangement, however care must be taken to document it properly.

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Introduction

A “gift and loan back” arrangement is a popular asset protection strategy that has been implemented in various forms for many years.

At the heart of the strategy is a “high risk” person transferring the equity in their assets to a “low risk” entity, while retaining the legal title to the assets. Utilising this strategy generally avoids tax and stamp duty consequences as there is no change in the ownership of the assets.

However, a recent decision of the Supreme Court of Queensland has cast a shadow on the efficacy of such an arrangement.

Example

Before we look at that Supreme Court decision, let us consider an example.

Assume a situation where John owns a house valued at $3 million and there is $1 million owing on his mortgage, giving him $2 million in equity. John is a company director and is concerned about the risk of being sued for insolvent trading or pursuant to personal guarantees he has provided. John wants to protect the equity in his house from creditors.

John implements a “loan and gift back” arrangement as follows:

  • John gifts $2 million to The Smith Family Trust (a low-risk trust controlled by John)
  • The Smith Family Trust loans $2 million to John and takes a (second) mortgage over John’s house.

The result of that arrangement is that there is no equity left in John’s home. If a creditor was to sue John and the house was sold, the proceeds would be divided between the bank and The Smith Family Trust. There would be no money left for the creditor. As John controls The Smith Family Trust, John would effectively retain the $2 million in equity.

As a general rule there are also no tax or duty consequences because there is no “disposal” or “transfer” of the house by John.

That said, like many legal arrangements regarding asset protection, there are ways the best plans can be undone.

Re Permewan

The recent decision of Justice Cooper of the Supreme Court of Queensland in Re Permewan No. 2 [2022] QSC 114 illustrates some of those ways.

In Re Permewan, Prue gifted $3 million to a trust controlled by her (Lotus Trust). As Prue did not have $3 million in cash to actually gift to the trust, the gift was effected by way of a “promissory note”. A promissory note is document that contains a promise to pay a third party (or the holder of the note) a sum of money on demand or at some future time. There are a number of technical requirements regarding their execution and delivery that must be strictly followed in order for them to be legally effective.

The trust then loaned $3 million back to Prue and took security over Prue’s assets.

The effect of the arrangement was that Prue had no equity available in her assets, and therefore effectively no estate to distribute when she passed away.

After Prue passed away, her two daughters (who were excluded from Prue’s Will) challenged the gift and loan back arrangement as part of family provision applications they had brought against Prue’s estate. The third child, Scott, was the sole beneficiary of Prue’s will and also controlled Lotus Trust.

Ultimately Scott conceded that the promissory note had not been “delivered” as required by section 90 of the Bills of Exchange Act 1909 (Cth), and as such remained “incomplete”. Consequently the $3 million had not been gifted to the trust, meaning the trust never had $3 million to loan back to Prue and the security taken by the trust did not secure anything. Accordingly the arrangement was unenforceable. This meant the entirety of Prue’s $3 million asset pool was exposed to the family provision applications.

In light of that concession and conclusion, Scott submitted it was unnecessary for the Court to consider the other bases upon which it was said the arrangement was unenforceable. The Court disagreed and went to on find that there were two other bases upon which the transactions were almost certainly unenforceable.

The first was that the arrangement was contrary to public policy. That was on the basis that the arrangement was illusory and its sole purpose was to ensure there was little, if anything, left in Prue’s estate, in order to thwart the daughters’ family provision applications. Accordingly the arrangement was contrary to the public policy underpinning the law regarding family provision applications.

The second was that the arrangement was a sham. Contrary to the terms of the promissory note, Prue never intended to pay the $3 million to the Lotus Trust. Furthermore, Lotus Trust never had any intention of receiving (nor seeking to enforce the payment of) the promissory note.

Takeaways from Re Permewan

There are some key takeaways from Re Permewan.

First, compliance with the technical requirements for execution and delivery of promissory notes is critical, and non-compliance means the arrangement is incomplete and ineffective.

Second, even if those technical requirements are met, the use of a promissory note to affect the gift is likely to be considered a sham. This issue can be overcome by ensuring cash is gifted (and then loaned back) by actually transferring the cash between the relevant bank accounts. In the event the “high risk” person doesn’t have sufficient cash available, consideration should given to borrowing sufficient cash in order to make the gift. While a traditional loan may not be appropriate, enquiries could be made with the client’s financier to see if they are able to facilitate the transaction. If all bank accounts are held with the financial institution they may be able to arrange for an appropriate round robin of immediate successive electronic funds transfers. Mere journal entries without an actual transfer of cash should be avoided.

Third, there is a risk that the gift and loan back arrangement is void against public policy. In re Permewan the issue was that the arrangement was void against the public policy upon which the law regarding family provision applications. That a promissory note was used, and that the arrangement was not intended to take effect during Prue’s lifetime, appears to have contributed to that conclusion. A distinction was drawn with the situation where a deceased had not entered into such an arrangement but had divested themselves of their assets before their death by transferring them to third parties – such a situation would generally not be void against public policy.

What is yet to be seen is whether such an arrangement could be void against public policy in a bankruptcy context – i.e. where the “high risk” person has entered into such an arrangement and becomes bankrupt. However, in the context of the voidable transactions provisions under the Bankruptcy Act 1966 (Cth) (discussed further below), it is perhaps unlikely that such an arrangement would be considered void against the public policy of the Bankruptcy Act in circumstances where the Bankruptcy Act contains specific provisions to “undo” transactions entered into that seek to defeat the policy of the Act.

Other issues

There are some other issues to consider.

As noted above, there are voidable transaction provisions contained in the Bankruptcy Act. Section 120 provides that where property of a person is transferred at an undervalue less than 5 years before they became bankrupt, the transfer is void. Section 121 provides that a transfer of property to defeat creditors is void if it was entered into at any time. Both of those sections could be used to undo the arrangement.

There are also issues of the person lacking capacity, engaging in unconscionable conduct or being unduly influenced. Any of those matters may result in the arrangement being unenforceable. Advisors should be alert, especially with elderly or vulnerable clients, to be on the lookout for a lack of capacity, or of taking instructions from a relative or other third party. Documenting the advice and the client’s understanding is important.

The loan from the low risk entity to the high risk person is often on uncommercial terms whereby no interest is payable and the repayment of principal is not required until sometime well into the future. Having the loan on commercial terms may assist in resisting any claim that the arrangement is a sham.

Finally, a gift and loan back arrangement should not be considered in isolation. The client’s broader objectives and structure should always be considered. It may be that other arrangements could be utilised to achieve the same result but with less risk. While they may lead to tax or duty consequences, those costs must be weighed up against the risk of the arrangement coming undone.

Conclusion

Gift and loan back arrangements are not dead. But, it seems the use of promissory notes to effect such arrangements is. They are not an “off the shelf” solution and should only be implemented after consideration is given to the client’s broader objectives and structure.

If you would like advice around gift and loan back arrangements, please contact me at michael@hillhouse.com.au or 07 3220 1144.

Areas of Expertise

Family Law
Debt, Recovery, Insolvency & Restructuring
Family Law
Wills & Estates
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Proposed enhanced protections for small business under the unfair contract terms regime in the Australian Consumer Law

Proposed enhanced protections for small business under the unfair contract terms regime in the Australian Consumer Law

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Proposed enhanced protections for small business under the unfair contract terms regime in the Australian Consumer Law

Author:  Michael Morris

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4 min read

24 Sep 2021

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    Key Takeaways
  • Since 2016 the protections under the “unfair contract terms” regime of the Australian Consumer Law (ACL) have been extended to protect small businesses who enter into standard form contracts to purchase goods or services from other businesses.
  • The Commonwealth Government recently published an exposure draft of a Bill that seeks to further strengthen the protections provided by the ACL unfair contract terms regime.
  • If the Bill passes into law without amendment, the new provisions will apply to standard form contracts that are entered, varied or renewed after the date that is six months after the Bill commences.

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The Australian Consumer Law (ACL) provides Australian consumers of goods and services with some of the world’s strongest protections in their dealings with big business.[1]

Since 2016 the protections under the “unfair contract terms” regime of the ACL have been extended to protect small businesses who enter into standard form contracts to purchase goods or services from other businesses.

Examples of such unfair contract terms include:

  • A term that would cause a significant imbalance in the parties’ rights and obligations under the contract;
  • A term not reasonably necessary to protect the legitimate interests of the party that would benefit from the term, or
  • A term that would cause detriment (financial or otherwise) to a small business if that term were to be applied or relied on.

Terms of contracts that have been determined by the courts to be unfair include terms that: [2]

  • Bind customers to subsequent contracts unless the customer cancels the contract within 30 days of the end of the term;
  • Allow unilateral price increases;
  • Remove a contractor’s liability for too wide a range of circumstances (where their performance was “prevented or hindered in any way”);
  • Provide for exclusive rights;
  • Provide for an unlimited indemnity (from legal costs and claims against the contractor); and
  • Prevent customers from terminating if there were payments outstanding and allowing the Contractor to continue to charge under the contract after termination.

The Commonwealth Government recently published an exposure draft of a Bill [3] that seeks to further strengthen the protections provided by the ACL unfair contract terms regime. 

The draft Bill seeks to achieve its aim of benefiting both consumers and small businesses by enhancing available remedies and enforcement powers by:

  • Prohibiting unfair contract terms from being included in standard form contracts (currently such terms are not prohibited);
  • Giving Courts the power to impose significant pecuniary penalties for contraventions;
  • Giving Courts the power to order a broader range of remedies, such as preventing an unfair contract term from being used in a future standard form contract, or ordering that an offending party publish information regarding their breach of the unfair contract terms regime on their website; or
  • Creating a rebuttable presumption that a term that has been deemed unfair in a particular contract is taken to be unfair if it is used again in a similar contract in the future.

The draft Bill also seeks to expand the class of contracts covered by the regime by:

  • Expanding the definition of small businesses that are protected to include businesses who have less than 100 employees or an annual turnover of less than $10 million (currently a business is only protected if it has less than 20 employees);
  • Providing that all standard form contracts entered by a small business will be covered by the regime irrespective of the amount payable under the contract (currently there are certain maximum thresholds).

The Bill is still in exposure draft form and was until recently open for public submissions prior to formally introducing it into Parliament

If the Bill passes into law without amendment, the new provisions discussed above will apply to standard form contracts that are entered, varied or renewed after the date that is six months after the Bill commences.

Standard form contracts are usually used for convenience, are cost-effective and a fast way of binding parties. However, if the Bill is passed into law, such convenience may now come with more risk and costs if an unfair contract term is included in the standard contract and relied upon.

Hillhouse Legal Partners can help you by undertaking a review of your business’s standard form contracts and assist you in complying with the unfair contract terms regime.

We can also assist if you think you, or your business, have been impacted by the operation of an unfair contract term.

To make a time to discuss your particular circumstances with us simply send us an email or call 07 3220 1144.

 

[1] ACCC Speech, Chairman Mr Rod Sims 15 March 2013

[2] ACCC v JJ Richards & Sons Pty Ltd [2017] FCA 1224

[3] Treasury Laws Amendment (Measures for a later sitting) Bill 2021

Areas of Expertise

Corporate & Commercial
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Getting the right deal: Understanding your rights regarding coal seam gas

Getting the right deal: Understanding your rights regarding coal seam gas

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Getting the right deal: Understanding your rights regarding coal seam gas

Author: Michael Morris

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6 min read

12 May 2021

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Signing the first version of a conduct and compensation agreement (CCA) that a coal seam gas (CSG) company puts under a landowner’s nose is a sure-fire way of the landowner kicking an own goal.

In our experience, CCAs prepared by CSG companies do not adequately protect landowners’ rights.

That view is shared among lawyers that represent landowners.

Landowners can protect their interests by applying some basic principles to negotiations and seeking legal advice from a lawyer experienced in dealing with CSG companies.

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After all, CSG companies are liable to pay for landowners’ reasonable legal costs of negotiating a CCA.

The basic principles include:

  • Understanding the scope of works;
  • Understanding the impacts from the works and infrastructure;
  • Negotiating compensation by reference to the preceding two points; and
  • Ensuring the CCA will stand the test of time.

In order for the landowner to understand the scope of works, the CSG company should provide the landowner with full details of the proposed works.

For example, the nature of the infrastructure (wells, pipelines, water tanks, access tracks), where the infrastructure will be located, the size of the area affected by the works, and how long it will take to construct the infrastructure.

This should all be set out clearly in writing, rather than just conveyed verbally – ultimately it will need to be included in the CCA.

The CSG company should also be able to state what it considers the impacts from the works and infrastructure are expected to be – for example by way of noise, dust, loss of visual amenity and loss of use of surface area.

However, a landowner should not rely solely on what the CSG company says – they should obtain their own advice from appropriate experts.

Unfortunately, the legislation does not require the CSG company to cover the costs of all experts, but a landowner may be able to negotiate with the CSG company to have those costs covered.

Once the preceding two points have been resolved, the focus can then turn to negotiating the compensation with reference to those points.

I cannot emphasise this enough – under the legislation the compensation is determined by reference to the actual impacts from the works and infrastructure.

In a number of recent decisions, the Land Court has been quite strong in striking down large “ambit” claims or claims that are not supported by evidence.

Ensuring the CCA will stand the test of time is also critical.

CCAs can remain on foot for decades.

During that time, the representatives of the CSG company may change, or the CSG company may sell their tenement to another CSG company.

Representations made by CSG company representatives over the kitchen table to the effect that something will or won’t happen, or that the CCA doesn’t need to say something because the CSG company doesn’t do business that way, are of no use unless they are reduced to writing and reflected in the CCA.

Furthermore, clauses in a CCA that are unclear or capable of different interpretations should also be avoided.

The reason is quite simple – in the event a dispute arises between the landowner and the CSG company regarding the CCA, the CSG company has the upper hand – they have the resources to engage a big law firm and Queen’s Counsel to argue their position before the court.

Most landowners will not have the capacity to return serve in the same way, and even for those that do, they generally don’t have the desire to do so.

Bearing in mind the above, I will outline a couple of examples of issues I have seen arise.

In most standard CCAs, the scope of works is defined very broadly. It will tend to include the specific infrastructure (for example a well), associated infrastructure (such as pipelines and access roads), and then also include a phrase such as “all things ancillary or incidental to the above”.

I have seen where a CSG company, under the guise of that phrase, installed a large water tank on a property and then proceeded to truck in CSG water produced by a CSG well on an adjoining property.

Needless to say the landowner did not consider that was within the scope of what they had agreed to.

Another example relates to the scope of the impacts that the landowner is being compensated for.

Most standard CCAs provide that the landowner is being compensated for all “compensatable effects”, which is defined in the relevant legislation to include all costs, damages or losses including consequential losses, caused by the CSG company carrying out their activities on the landowner’s property.

This means the landowner may be agreeing to give up their rights to compensation for certain impacts without knowing it.

For example, assume a single CSG well is drilled on a property. Expected impacts are typically noise, dust and loss of use of a certain area of land.

The landowner has in mind that the compensation they agreed to covers those things.

What happens then if, for example, a bore dries up, a stud bull is killed, crops are impacted or land tax is imposed?

The loss and damage suffered by the landowner from the occurrence of those things is arguably a “compensatable effect” that is covered by the agreed compensation, even though the landowner may not have understood that to be the case when they signed the CCA.

A landowner doesn’t want to end up in an argument with the CSG company as to whether or not they are entitled to additional compensation for things the landowner thought the compensation was not intended to cover.

While there is a provision in the legislation that allows the landowner to apply to the court for the compensation to be varied if there is “a material change in circumstances”, a landowner does not want to be in a position of having to make such an application.

In any event it may be the case that there has not been a material change in circumstances – the CSG company might argue, for example, that when the CCA was signed it was foreseeable that crops could be impacted or land tax imposed.

In conclusion, landowners should take a considered, steady, systematic approach to dealing with CSG companies.

Landowners should also seek legal advice at an early stage to ensure their interests are protected.

This article was originally written for 

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Mining, Energy & Resources
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Insurance alarm bells ringing for landowners with CSG infrastructure on their properties

Insurance alarm bells ringing for landowners with CSG infrastructure on their properties

Home » Michael Morris

Insurance alarm bells ringing for landowners with CSG infrastructure on their properties

Author: Michael Morris

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2 min read

12 Jul 2020

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    Key Takeaways
  • The Insurance Australia Group has announced that its major rural and regional insurer, WFI, will join its other subsidiary, CGU, in no longer providing public liability coverage if there are “unconventional gas” operations on a property.
  • The Insurance Council of Australia (ICA), the Australian Petroleum Production and Exploration Association (APPEA) and other groups have engaged in discussions to secure appropriate public liability cover for affected landowners.
  • All landowners with CSG infrastructure on their properties should contact their insurer or broker to ascertain whether they will continue to be covered. Landowners engaged in negotiations with CSG companies should address the issue when negotiating the terms of their conduct and compensation agreement.

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In recent months, Agforce members will have read about concerns that some insurers are no longer offering public liability insurance to landowners that have coal seam gas (CSG) infrastructure on their properties.

The issue first came to light in May 2020, when Insurance Australia Group (IAG) confirmed its major rural and regional insurer, WFI, would join its other subsidiary, CGU, in no longer providing the coverage if there are “unconventional gas” operations on a property.

In early July 2020, it was reported the Insurance Council of Australia (ICA), the Australian Petroleum Production and Exploration Association (APPEA) and other groups were continuing discussions on liability cover for landowners.

An ICA spokesman said the ICA believed contracts between CSG companies and landowners should indemnify landowners for CSG-related risks.

A Landholder Insurance Issue Working Group has also been convened by the Gasfields Commission to investigate the issue.

Ultimately, in late June 2020 Agforce announced that they had been able to assist members in sourcing alternative public liability insurance coverage, which in many instances resulted in lower premises. 

In light of these developments, we strongly recommend that all landowners with CSG infrastructure on their properties immediately contact their insurer or broker to ascertain whether they will continue to be covered. 

For those landowners currently engaged in negotiations with CSG companies, we recommend this issue be specifically addressed in when negotiating the terms of the conduct and compensation agreement.

The agreement should clearly set out that the landowner’s rights in respect of any increase in insurance premiums or unavailability of insurance, as a consequence of CSG infrastructure being situated on their property, are not compromised. 

Similarly, the agreement should also provide that the landowner’s rights in respect of any increase in Council rates, or inability to obtain a full exemption from land tax, as a consequence of CSG infrastructure being situated on the property, are not compromised. I note my previous article with respect to the potential for an increase in rates.

For those landowners with conduct and compensation agreements already in place, in the event their insurance premiums increase or they are unable to obtain insurance, they should seek legal advice immediately. The path to resolving the issue may depend on the wording of agreement with the CSG company.  

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