Extract from Press release and interview on Sky News Business Edition on Thursday 1st June 2006
There have been some recent changes to laws in Australia that now arguably make it ineffective to protect your family home from a Trustee in Bankruptcy. You can no longer put the family home in the name of your spouse and expect to keep it if you go broke.
The community, including leaders such as Accountants, should never loose sight of the fact that bankruptcy can happen through no fault of the bankrupt, such as fraud by an employee, or the failure by an important customer to pay their debt.
One of the most extraordinary aspects of new Bankruptcy legislation is that it ignores the contribution of a wife, who stays home and looks after the children, to the finances of the family. The law has been passed by Parliament, despite a number of objections noted below, and commenced on 31 May 2006.
What has happened is that the Howard government has overreacted to the tall poppy syndrome associated with the failed barristers who never paid their taxes. The subject has been given strong media attention and therefore, the government has made reactive changes to the laws. The changes have not been considered as part of a pro-active overall review of the Bankruptcy laws. Rather, they are the result of the government reviews of the family laws having regard to the Barristers conduct.
It is interesting to look into the history of these particular changes to the law
"Looking back over the history of these recommendations, we see that it is partly based on a media furore which occurred from 2001 when Paul Barry wrote a series of articles pointing out that bankruptcy was a way in which barristers were avoiding paying tax. The bill also addresses what has been the extremely common practice where high-income earners who experience financial difficulty declare bankruptcy to avoid paying their debts, to the detriment of others."
In March 2001 the Attorney-General and the then Assistant Treasurer established The Joint Taskforce on the Use of Bankruptcy and Family Law Schemes to Avoid Payment of Tax. The Taskforce was to consider the activities of some barristers who have repeatedly used bankruptcy as a means of avoiding payment of tax. The Taskforce consisted of officers from the Attorney-General's Department, Insolvency and Trustee Service Australia, the Australian Taxation Office and the Treasury.
The Taskforce made a number of recommendations for amendments to the Bankruptcy Act 1966 and the Family Law Act 1975 and in particular as to the interaction of the two pieces of legislation.
The Taskforce issued a report back in 2003 recommending changes to the Bankruptcy Act. On 2 May 2003, the Government released an edited version of the Taskforce report. This version has been edited to ensure that it does not include specific information which explains details of the schemes used by the barristers considered by the Taskforce to avoid paying tax.
"Then in 2004 it produced an exposure draft that went overboard with a disproportionate response to the problem. It proposed retrospective laws and a reversed onus of proof. That draft also would have undermined legitimate asset protection arrangements, where families divide their property so that all family members are not exposed to the business and credit risks taken by one. Bankruptcy law has to get the balance right between cracking down on rorters and protecting legitimate family arrangements. The exposure draft got it completely wrong – and a furore erupted. Coming up to the 2004 election the Government took the anti-avoidance parts of that plan completely off the table. This was the return to another period of inaction. Rather than have another try at more sensible legislation, the Coalition gave up on getting anti-avoidance right. The Attorney-General came back with the Bankruptcy and Family Law Amendment Bill – basically the exposure draft minus the anti-avoidance schedule."2
In March 2006 the Bill was passed, which coincided with the High Court decision in the Cummins case. The High Court decision is ironic.
It is the case which deals with the highest profile instance of tax avoidance by a Barrister. It was this Barrister's bankruptcy almost 5 years ago that started the media furore and it took 5 years for the High Court to consider his case. Co-incidentally, it took 5 years for the Government to change the laws.
Since the High Court's decision in the matter of John Cummins QC was handed down on 7 March 2006 several lawyers have pointed out that this legislation is now not necessary and could impact negatively on the spouse of, say, a problem gambler. There is a possibility of this and we must recognise that one of the consequences of shifting the law like this is that people may be hurt at the margins.3
In my opinion, these law changes, which are becoming known as the Barrister amendments, have gone too far and now impact upon the lives of everyday Australians.
Separately, the question has not been pressed as to the inefficiencies of the Taxation Department in letting people get away with failing to lodge income tax returns for over 20 years. The average small business proprietor can tell you about the reminders they receive from the ATO if they are slightly late with their quarterly BAS return!
Turning to the new law, The Bankruptcy Legislation Amendment (Anti-Avoidance) Bill 2006 was passed by Parliament on 30 March 2006. This Bill contains amendments designed to strengthen the ability of bankruptcy trustees to recover property transferred prior to bankruptcy and property acquired by a third party prior to bankruptcy using the bankrupt's resources and from which the bankruptcy has derived a benefit.
The other amendments will:
- increase the time limit for recovering under-market value transfers parties;
- allow the trustee to recover consideration paid to third parties circumstances;
- create a rebuttable presumption of insolvency where a bankrupt keep proper records; and
- void those transfers where it was reasonable for the transferee bankrupt was trying to avoid creditors.
These changes will also address the situation where, for example, the bankrupt has diverted his income in order to fund the purchase a house property in his partner's name, and the bankrupt derives a benefit by living in that property.4
You will see from the new Section 139EA of the Bankruptcy Act, that these changes could apply to the following circumstances:
- The family home was or is in the wife's name.
- The husband has been making financial contributions by paying off the mortgage, while she stays at home and looks after the kids (i.e. he is the only person earning an income).
- the husband lived there (i.e. he obtained an indirect financial benefit from the property).
- The value of the wife's interest in the property has increased by the amount that the mortgage has decreased and the amount that the property has increased in value, possibly due to market forces.
The section states;
139EA Order relating to increase in value of property of natural person
If, on an application under section 139A for an order
in relation to a respondent entity that is a natural person,
the Court is satisfied that:
(a) during the examinable period, the value of the entity's interest in particular property increased as a direct or indirect result of financial contributions made by the bankrupt during that period; and
(b) the bankrupt used, or derived (whether directly or indirectly) a benefit from, the property at a time or times during the examinable period;
the Court may, by order, direct the entity to pay to the applicant a specified amount not exceeding the amount by which the value of the entity's interest in the property increased as a result of the financial contributions made by the bankrupt.
In those circumstances, the Court can order that the wife pay to the Trustee of the husband that amount which the value of the property has increased. The amount is calculated on the increase over the five years before the bankruptcy.
Just imagine the amount of home loan payments and potential increase in land values over that period of time.
Alternatively, if the property was bought using resources provided by the husband and is still owned by the wife, then under the new Section 139DA, the Court can make an order that the whole interest in the property vests with the Trustee in Bankruptcy. In other words, the Trustee gets the house, even if it is in the wife's name.
These consequences are apparent from a simple reading of the new legislation.
Alarmingly, there is no requirement for the Court to have regard to any contribution made by the wife, particularly if there is no financial or monetary contribution.
There is an obligation for the Court to take into account any hardship that the order might cause (see section 139F). At the same time, the Court must take into account the hardship that might be caused to the creditors of the bankrupt if the order is not made. These accounts (of the wife's hardship and the creditor's hardship) will probably offset each other and be disregarded.
As noted above, there has been a development that may be more significant and effective than these changes to the legislation.
This is because of the recent High Court decisions involving Mr. Cummins, the bankrupt Barrister, who did not lodge his tax return for 40 years.
The High Court announced a new principle that will effect all property owned by one spouse for the purpose of protecting it from the possible future creditors of the other spouse. This is known, in the professions, as estate planning or asset protection.
The High Court said that effectively, all husbands and wives will own properties jointly and equally, regardless of the financial contribution they've made to purchase the property.
The Court was very realistic when suggesting that husbands and wives tend to mix their financial affairs and that the obvious intention, whenever buying a property together, is for that property to be owned jointly and equally by the husband and wife. The High Court said that this must be the starting point, even if the funds came from different bank accounts of the husband and the wife.
The High Court said
"It is often a purely accidental circumstance whether money of the husband or of the wife is actually used to pay the purchase price to the vendor, where both are contributing by money or labor to the various expenses of the household. It is often a matter of chance whether the family expenses are incurred and discharged or services are rendered in the maintenance of the home before or after the purchase."
"Where a husband and wife purchase a matrimonial home, each contributing to the purchase price and title is taken in the name of one of them, it may be inferred that it was intended that each of the spouses should have a one-half interest in the property, regardless of the amounts contributed by them."
"That reasoning applies with added force in the present case where the title was taken in the joint names of the spouses (even if the funds came from the bank account of one of the spouses)."
This principle is separate to the specific provisions introduced into the Bankruptcy Act, which have added to the Trustee's ability to take away the family home. The difference is that the Bankruptcy Act changes apply to payments made during the 5 years before bankruptcy, whereas the High Court decision, which will have to be clarified in future court cases, appears to be totally retrospective to the time of a person's marriage.
What happens from now is a very real problem. In effect, the family home is not safe anymore.
Or is it?
1. BANKRUPTCY LEGISLATION AMENDMENT (ANTI-AVOIDANCE) BILL 2006 Second Reading, Senator MURRAY (Western Australia) (8.11 p.m.)
2. BANKRUPTCY LEGISLATION AMENDMENT (ANTI-AVOIDANCE) BILL 2006: Second Reading, 29 March, 2006, Ludwig, Sen Joe (ALP, Queensland, Opposition) (8.11 p.m.)
3. BANKRUPTCY LEGISLATION AMENDMENT (ANTI-AVOIDANCE) BILL 2006: Second Reading, Murray, Sen Andrew (AD, Western Australia, Opposition) 29 March, 2006
4. paragraph 62, Explanatory memoranda, Bankruptcy Legislation Amendment (Anti-avoidance) Bill 2006
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.