Bank of Mum and Dad
With well over $2.5billion being advanced by parents to their children to help them acquire property care should be taken as to the nature of the advance. Many of the advances are done with no documents in place. In the absence of any other explanation the advance will likely be deemed a gift under the presumption of advancement.
This means the advancement is available to the child's spouse if a divorce occurs and their creditors should they go bankrupt.
Serious consideration should be given to gifting the advance to a BOMAD Trust and have the trustee lend the funds to the child.
What is the presumption of advancement?
The presumption of advancement is an equitable principle that applies when a husband provides or contributes to the purchase price of a property, giving the wife a legal interest. This presumption can also apply when parents provide or contribute to the purchase price of a property in the name of a child.
This "presumption" emerged from courts of equity inferring that the gift was intended as an "advancement" based on the relationship type. Some Australian judges have noted that the presumption of advancement is not truly a "presumption" but rather a description of situations where the presumption of a "resulting trust" (for the purchaser) does not apply.
In cases where purchase money is jointly provided by two or more parties, and the property is titled in one party's name, equity will presume a resulting trust in favour of the other contributing party or parties.
The Commissioner of Taxation's challenge to the presumption
The High Court decision in Bosanac v Commissioner of Taxation [2022] HCA 34 reaffirmed the presumption of advancement in Australian law. Despite the Commissioner of Taxation's argument to abolish it, the Court upheld this principle.
Background: Mr. and Mrs. Bosanac bought a house in Dalkeith, WA, with joint funds and a joint mortgage, but the property was registered solely in Mrs. Bosanac's name. The Commissioner sought to declare that Mr. Bosanac had a 50% beneficial interest in the property due to his tax debt.
Legal Issue: The case centred on the beneficial ownership of the property, considering the presumptions of resulting trust and presumption of advancement.
Court Decisions:
Federal Court: Initially ruled that the presumption of advancement applied, meaning the property was not held beneficially for Mr. Bosanac.
Full Federal Court: Reversed this decision, stating that Mr. Bosanac had a beneficial interest due to his financial contributions.
High Court: Ultimately reinstated the Federal Court's decision, confirming the presumption of advancement.
The High Court's ruling emphasized that the presumption of advancement remains a significant part of Australian law, despite arguments that it is outdated and discriminatory.
Considerations for Parents
It is better for both the parents and children if the purpose of the advancement is clearly documented.
A better arrangement would be to gift the money into a trust and have the trustee make an interest-free loan to the child. If the funds are to form part of the pool for all children, then the gift would be to a succession trust would be appropriate. The succession trust could then make a loan to the child.
If the advancement is to be quarantined for a particular child then a BOMAD Trust should be considered.
Bank Of Mum And Dad Trust (BOMAD Trust)
A BOMAD Trust is a special purpose trust where Mum and Dad are the Principals and Appointors. If Mum and Dad were to pass away the child with the loan becomes the Principal Beneficiary and Appointor.
A special feature of the BOMAD Trust is that Mum and Dad can resign as Principal Beneficiaries and Appointors before their death and the child with the loan becomes the Principal Beneficiary.
Should the child with the loan predecease the parents then the remaining children of the parents become the Principal Beneficiaries.
The benefits of a BOMAD Trust:
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