It’s common advice to give the family home to your spouse when undertaking a risky venture, but this is no shelter from the tax office.
A recent Federal Court tax 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 front of mind. This ruling may have serious implications for doctors or healthcare professionals and practice owners.
In the Commissioner of Taxation v Bosanac [2021] FCAFC 158, the court made a judgment against the taxpayer for unpaid taxes. It established that 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.
Vlado and Bernadette 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, Western Australia. The property was then used as collateral to acquire other investment assets like shares.
The justices found 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.
It is very common for people to transfer assets to a spouse (or family trust) before embarking on an activity such as going into practice, becoming a partner in a medical or healthcare practice or undertaking a “risky” development.
Back in the 1990s 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!”
That is, how to make money in healthcare, keep it from the tax office and hide your money from people who wanted to sue you.
While the basic principles remain the same, there are some recent big buts.
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 covid practice outbreak causing the practice to shut down and quarantine all staff for 14 days for a costly deep clean;
State or federal government multi-million-dollar 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?
Unwittingly, you may have placed your family home at risk when you followed your accountant’s advice to put the house in the spouse’s name. This latest court case shows how something that appears simple can go horribly wrong.
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 your level of 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 has supported this view up to a point. Sackville J in Prentice v Cummins (2002) 124 FCR 67 says: “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.”
But the more Federal Court decision of Turner (As Trustee of Bankrupt Estate of Wallace) v Wallace [2016] FCCA 963 found that when the respondent transferred the family home to his wife just before he invested in a failed car-detailing business, he had done so with intent to defeat creditors. 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
Despite the Wallace precedent, the recent decision may come as a surprise to many lawyers and accountants. How can you protect your home (or other assets)?
At Health and Life we have 14 tips that might help, which 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 any entities you are a director of. Company directors can now apply for their new director identification numbers.
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 Australia Business Registry Services online using the myGovID app. 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.
This was originally published at healthandlife.com.au
David Dahm is a registered tax agent, former AGPAL surveyor, CEO and founder of medical and healthcare chartered accounting firm Health and Life and global Founder and CEO of the International Healthcare Standards and Ethics Board
Disclaimer: This information is for general information and discussion only; please seek appropriate legal and accounting advice
