How Will I Get You A Loan?

Mr Gerbic was a generous father.  He bought a town house for his 23 year old son but, concerned that his son needed financial protection, he decided to purchase the house in their joint names. The son lived in the property for five years and then sold it at a substantial profit. Mr Gerbic allowed his son to receive all of the sale proceeds.

As the property was the son’s principal place of residence, he was entitled to a full exemption from capital gains tax.  However, Mr Gerbic (senior) was assessed as liable for capital gains tax on his own half share of the profit.

He objected on the basis that he was not really the owner of an interest in the property – that his own interest was effectively held on trust for his son. However, as he was unable to produce any proof of the existence of a trust, his tax assessment was upheld in the Administrative Appeals Tribunal (taxation appeals division 2013 AATA 664).

It is interesting to consider whether, if Mr Gerbic had his time again, he would have done things differently. What risks was he trying to avoid?

They might include:

  • the son running up substantial debts which force him to sell the property; or
  • the son being exposed to a family law claim from his wife or de facto partner.

However, if the son had become insolvent or his relationship broken down, the father may have been less inclined to argue that the son really was the beneficial owner of the whole property. The father may have been happy to receive a capital gains tax assessment if it kept half of the sale proceeds away from his son’s creditors or former spouse or partner.

The father’s objectives may have been achieved had he lent money to his son to complete the purchase and taken a security interest against the property. In the event of a claim by the son’s creditors, the father could insist on repayment of his loan in priority to the son’s other creditors.

If the son were to become a party in family law proceedings, he could perhaps argue that the value of his assets should be reduced to take into account the debt owed to his father. However, there would always be the risk that the Family Court would view the loan as a loan in form only, but in reality a gift, because the father had no intention of seeking repayment of the debt.

For further information about how to structure your property affairs, contact David Miller or Kott Gunning’s Property Team on (08) 9321 3755.

The information published on this website is of a general nature and should not be construed as legal advice. Whilst we aim to provide timely, relevant and accurate information, the law may change and circumstances may differ. You should not therefore act in reliance on it without first obtaining specific legal advice.