BALDWINS • FoodLegal

Australian Lawyers and Consultants

Asset Protection – New Laws Being Suggested by Task Force

January 2003

The Australian media contains more and more stories of business people and professional advisers who have fallen from grace. These stories remind us that others can suffer the same fate and that precautionary steps to protect one’s assets may be desirable. Two of the more common methods of achieving a level of protection have been transfers of assets to either a spouse or to a discretionary trust.

Some laws actually recognize the desirability of intra-spouse transfers and offer tax concessions. For example, there are stamp duty exemptions in most Australian States and Territories for transfer of land between spouses in prescribed circumstances. Further tax concessions (e.g. capital gains tax rollovers) exist for spouses who transfer assts between them (or associated entities, in some circumstances) when in the process of matrimonial dissolution.

However, some of the matters recently raised by a Federal government taskforce which involved the use of bankruptcy and family law schemes to avoid payment of tax indicates the government's concerns with existing asset protection measures and may indicate that these avenues may not remain fully effective in the future.

One of the options that the joint taskforce (consisting of the Attorney General's Department, Insolvency and Trustee Service Australia, the Australian Taxation Office and the Federal Treasury) raised, is whether courts should be empowered to determine asset recovery applications by trustees in bankruptcy where associated entities (including family members) of the bankrupt holds assets sourced from the bankrupt’s income flow or activities. Giving courts discretion to be exercised in accordance with legislative guidelines may well be an attractive means by which the Federal Government would like to compel more assets to be held in personal names and diminish the tax effective use of alternative asset protection structures.

Another option being considered in a similar vein is for the Bankruptcy Act to be amended to introduce a new “act of bankruptcy” to apply where a person is rendered insolvent as a result of assets being transferred pursuant to a financial agreement under Part VIIIA of the Family Law Act. Currently, such an agreement has the status of a “Maintenance Agreement” for the purposes of the Bankruptcy Act, and have been used as a tool in asset protection. A financial agreement can be made before or during the marriage or following separation. It is a binding agreement dealing with the distribution of property in the event of the marriage breaking down. It may also provide for the maintenance of either party to the marriage or their children.

Generally, such an agreement need not require court approval or registration, although it is often advisable. Importantly, binding financial agreements provide for a potential breakdown which means that the marriage need not actually have to collapse for the asset protection, conferred by such an agreement, to apply. Again the Federal Government – with an eye to protecting the revenue – would want to ensure that capital gains tax minimization does not arise in a matrimonial separation context by virtue of abuse of such an agreement.

For further information, contact Joe Lederman at BALDWINS, Australian Lawyers & Consultants.

Return to the Tax Law Archive.