Your client’s assets are worth $3 million. After signing six documents, they still own everything. But on paper, they owe $3 million to their own trust.
That is a gift and loan back arrangement. It works, but only when the execution is genuine.
How it works
The owner “gifts” money to a discretionary trust by promissory note. The trust “lends” it back, secured by mortgage over the owner’s assets. No money changes hands. No stamp duty. No CGT. The owner keeps possession. But the assets now appear encumbered by a debt equal to their full value.
The pitch: creditors, ex-spouses and family provision claimants see a worthless estate.
What the courts said
Re Permewan (No 2) [2022] QSC 114 is the cautionary tale. Cooper J held the promissory note had never been delivered. The sham and public policy arguments, resting on the arrangement’s purpose of defeating a family provision claim, were assessed as strong enough for an administrator to pursue.
Turner v O’Bryan-Turner [2021] NSWSC 5 exposed documentation risks. Promissory notes were executed without amounts or repayment dates, invalid under the Bills of Exchange Act. Mortgages were unstamped. Ward CJ in Eq found undue influence where the owner received no independent legal advice and the solicitor’s explanation was described as little more than a “marketing presentation”.
Atia v Nusbaum [2011] QSC 44 shows it can be done right. The arrangement was upheld because money actually changed hands and the documentation was properly prepared. No sham.
The benefits and the traps
The appeal is obvious. No asset transfer means no duty, no CGT and no loss of control. A properly executed arrangement can create a legitimate secured interest ranking ahead of unsecured creditors.
But the traps catch those who cut corners.
First, if no value actually moves, courts will look through it. Circular paper transactions where the owner retains full control are vulnerable to being set aside as shams.
Second, promissory notes must comply with the Bills of Exchange Act 1909 (Cth). Incomplete notes (missing amounts, missing dates) are fatal.
Third, independent legal advice is essential. Where a family member initiates the arrangement and the owner does not receive separate advice, undue influence becomes a live issue.
Fourth, purpose matters. If the sole purpose is defeating a family provision application, Re Permewan treats that as vulnerable on public policy grounds.
The line between Atia and Permewan is substance. Real transactions with real movement of value hold. Paper transactions designed to create an illusion of debt will not.
General information only. This note was accurate when written. The law may have changed since and the note is not updated. It is not legal or tax advice, does not take account of your circumstances and must not be relied upon as a substitute for advice on your own matter. If the issue is live for you or your client, email arda@nortonquaytaxlaw.com.au for advice on the current position.