For decades, it has been common practice to split spouses into the ‘at-risk’ spouse and the supposed ‘risk-free’ spouse. So while the at-risk spouse, being a doctor, professional, or business owner, is out there making money and building wealth, the family’s assets reside in the names of the risk-free spouse as a protection against litigation.
The common argument goes like this – NTAA Asset Protection Seminar notes 2021:
“It is important to be able to identify which individuals or entities are considered ‘high risk’ (and are hence more likely to be at the mercy of creditors in difficult times) and which ones are ‘low-risk’. Upon making this risk assessment, ideally, the ‘high-risk’ individuals or entities are divested of any valuable assets to try and keep them out of the creditors’ reach. In turn, the group’s ‘low-risk’ individuals or entities would be best to hold these assets. In the end, if the ‘high-risk’ individual or entity is pursued by creditors, then further losses may be kept to a minimum where the individual or entity does not actually have any assets for the taking.”
Millions of professionals, including thousands of accountants, have adopted this policy on the basis that it was a good strategy at the time. However, like any asset protection strategy, when the ATO brings out its big legal guns, it will need to be not only fireproof but nuclear proof.
And with an explosion, the Full Federal Court in September 2021 blew apart this strategy. So what happened, and more importantly, what do we do now?
In a relatively short, 14 page unanimous judgment, the Full Federal Court in Commissioner of Taxation v Bosanac  FCAFC 158 stated:
“The issue in this appeal is whether, contrary to the judgment of the primary judge, Mr. Bosanac held an equitable interest in the residential property purchased for $4.5 million in the name of Ms. Bosanac only. The deposit of $250,000 was paid with funds from a joint loan account. Mr. and Ms. Bosanac then jointly borrowed $4.5 million from Westpac, and this was used to pay the balance of the purchase price.”
The legal counsel for Mr. and Ms. Bosanac argued that there is a presumption at law when the asset is held in the spouse’s name that it is an advancement or a gift from one spouse to the other. The Court disagreed and said that in relation to the property in Dalkeith WA:
“We infer from these facts that at the time of the purchase, Mr. Bosanac and Ms. Bosanac intended that Mr. Bosanac would have a 50% beneficial interest in the property that was to be their matrimonial home.”
To be fair, as every lawyer and judge will tell you, each case needs to be heard on its merits but expect the Commissioner of Taxation to be emboldened by this case. And importantly for all accountants with clients in this position, it is vital to be in front of the curve and let them know that the law has grown to cover their situation potentially.
So what to do now? Well, if you have applied this strategy to yourself or for clients, we need to develop a solution that will be effective. Some clients will want to roll the dice but would you with the ATO and a Full Federal Court decision?
I have come up with a few solutions to the problem, which I will unveil at a webinar on 25 November 2021 at 12.30 pm AEDT. Specifically, both myself, Michael Jeffriess from Eventum Optimum, and Tim Munro from Change GPS will review the Court’s decision in Bosanac and:
1. Look at who is impacted and why
2. Methods of rectification
3. Two solutions to tighten up asset protection
4. How the decision impacts estate planning for clients affected.
This is a crucial webinar, and you will get answers and solutions, not a simple head in the sand review of the case. At LightYear Docs and Abbott & Mourly lawyers – we are always strategic.