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Protecting your home using lessons and implications from the Bosanac case

Protecting your home using lessons and implications from the Bosanac case

When dealing with many bankrupt estates, the family home is often the single biggest asset available to a trustee. The emotional distress and pressure on the family unit are often severe consequences of bankruptcy.

To the ordinary person who has little or no knowledge of bankruptcy laws, the natural reaction to financial distress is to panic for fear of losing their family home and potentially their family. A related question an insolvent person may have is “whether a trustee could sell a property registered solely in their partner’s name?”

The recent High Court judgement in the case Bosanac v Commissioner of Taxation & Anor [2022] (“the Bosanac case”) HCA 34 has provided illumination to this question which has taken some legal observers by surprise.

The High Court’s ruling

On 12 October 2022, the High Court of Australia confirmed that the “principal of advancement” remains part of Australian law when it comes to financial dealings involving husbands and their wives.  This is notwithstanding that the Commissioner of Taxation submitted that the principal “had no acceptable rationale and was anomalous, anachronistic, and discriminatory, and consequently, it is no longer part of the law of Australia in relation to the matrimonial home.”

Some progressive legal observers have seen the ruling as being the most significant case law precedent set since the 2006 High Court ruling in the matter of Trustees of the Property of John Daniel Cummins v Cummins [2006] HCA 6; (2006), commonly known as the “Cummins case”.

The Cummins case set a new legal precedent that placed in jeopardy, properties of which, a bankrupt was not a registered owner by relying on the “principal of a resulting trust”.  This relates to the presumption where a person makes a financial contribution to the purchaser of a property by another person, the purchaser who is recorded as the sole owner of the property, holds a portion of their property on trust for the other person. In effect, any property which was registered in the sole name of the non-bankrupt spouse could be subject to a claim by a trustee in bankruptcy by way of resulting trust.

The outcome of the Bosanac case is to confirm the application of the “presumption of advancement of a wife by her husband by way of his financial support to her“ which is based on old English legal principle dating back to the days gone.  This principle was based on the normal practice of that time where husbands went to work whilst their wives stayed home raising their children and running the household. It should be noted that whilst the presumption of advancement also applies to the relationship between parents and their children, it does not apply to a wife “advancing her husband”. Likewise, it does not apply to de-facto couples of any gender.

So, suppose a wife becomes a bankrupt and is the sole owner of their matrimonial home to which her husband has made no financial contributions.  In that case, the non-bankrupt husband cannot claim to have an equitable interest in the home on the basis that his wife had gifted an interest in her property to him by way of “his advancement”.

The case provided a lesson to couples in a marriage or those involved in property ownership to define and record their intentions concerning ownership of the property from the outset.

Understanding the Bosanac case

Mrs Bosanac, who has been described in the press as “a glamorous socialite and lifestyle blogger who operates a spray tan business called Perth Glow”, was successful in retaining her Dalkeith home, of which she is the sole registered owner.  When the High Court of Australia, comprised of five judges, recently upheld her appeal against the decision of the Full Federal Court, comprising of three judges, which had set aside the decision of a single judge of the Federal Court, who had dismissed an application by the ATO seeking a declaration that Mr Bosanac held a 50% beneficial interest in her home by way of a resulting trust.

Mrs Bosanac had purchased the Dalkeith home for $4.5M in 2006 with loans taken out jointly with Mr Bosanac.  These loans were secured over the Dalkeith properties plus properties they each owned separately.  They had a history of holding their substantial real and other properties in their own names and using them as security for joint loans.

The Dalkeith property was the matrimonial property of Mr and Mrs Bosanac, who separated in 2013. However, Mr Bosanac, who lived in the property until 2015, never claimed an interest in the property.

On 29 April 2016, the ATO obtained judgment against Mr Bosanac for $9,344,111.89 for unpaid income tax and penalties which remains unpaid, following an audit of his financial affairs commenced in 2014.

The ATO also obtained judgment against Mrs Bosanac for $5,696,983.19, which she subsequently had reduced and then paid the residual balance with the assistance of a loan made to her by a friend.

Instead of taking bankruptcy action against Mr Bosanac, the ATO elected to apply to the Federal Court for a declaration that he held a 50% beneficial interest in the Dalkeith home by way of a resulting trust.

However, Mrs Bosanac successfully defended the ATO’s claim with the primary judge holding that the presumption of advancement arose in her favour, thereby precluding a resulting trust from arising.

The Full Federal Court upheld the Commissioner of Taxation’s appeal finding that Ms Bosanac did hold a 50% interest in the Dalkeith property on trust for Mr Bosanac in accordance with the resulting trust principles established in the Cummins case, which established the ‘Cummins principle’.

Bankruptcy trustees relying on the Cummins principle proceeded to make claims of an equitable interest in properties registered solely in the name of the bankrupt’s spouse or held in uneven proportions in a tenancy in common. This action had significant implications for traditional asset protection strategies by precluding the notion that a partner can ‘gift’ contributions (such as a deposit or mortgage repayments) towards acquiring a house registered solely in the other partner’s name. In addition, registering property in a sole name would not protect a claimant wishing to pursue an interest against the property for the non-registered partner.

In other words, marriage or the sharing of the various household expenses, including payments towards the mortgage, would render the property ownership as if it were registered in both names.

It appeared that nothing had changed in the way Courts view these types of scenarios until the High Court upheld Mrs Bosanac’s appeal thereby re-instating the primary judge’s decision.  This held that Mr Bosanac did not have an equitable interest in his wife’s Dalkeith property because of the principle of advancement notwithstanding that the facts and circumstances in the case appeared similar to those in the Cummins case.

The Bosanac case was a typical example of a case where one partner (Mrs Bosanac) was registered on title solely, but both partners had contributed to the deposit and registered as co-borrowers for the property. They shared expenses and each contributed to the loan.

Moreover, the High Court ruled in favour of Ms Bosanac despite the mortgage loan being cross-collaterised over one of Mr Bosanac’s properties and a further refinance secured against the Dalkeith property for funding share trading investments for Mr Bosanac. Some legal observers considered that prior to the Bosanac ruling, the above facts would almost certainly attribute a beneficial interest to Mr Bosanac, which a trustee could claim.

The Court’s ruling was based on the facts of the case.  Although there was no clear record of the parties’ intention, the Court was satisfied that the facts at the time of the purchase of the property led to an inference that it was Mr and Mrs Bosanac’s intention to purchase a property solely for the benefit of Mrs Bosanac. One such fact was that the Bosanacs had documented history of purchasing properties for the benefit of one of the partners and assisting each other to qualify for finance to purchase the property. It was also significant that Mr and Mrs Bosanac had no history of owning property jointly.

The intention of the parties at the time of the purchase had been established in case law before.  For example, it was applied in the case Weston v McAuley [2017] FCCA 1. In that case, the non-bankrupt wife intended to purchase the property for their own benefit, but they needed to purchase the property in joint names to meet the lender’s eligibility criteria for the home loan on the house. The Court ruled in favour of the bankrupt’s wife, who owned a 95% share, holding that the Cummins Principle did not apply.

ATO blunder and trustee’s predicament

It should be noted when the primary judge heard the ATO’s initial claim in 2016, the total net equity in the Dalkeith property was estimated to be only $400,000, about which the judge made a very pertinent comment, “ I observe that such a sum may be rather modest, a factor surely relevant to how the parties proceed. She (Mrs Bosanac) says that once the house is sold and there is some certainty around the quantum of the dispute, she hopes that she may be able to resolve it sensibly by consent.”

The judge was apparently indicating to the ATO that it should consider mediating its claim for $200,000 against Mrs Bosanac instead of litigation.

However, due to the high profile of both Mr and Mrs Bosanac in Perth, the ATO may have set out to make an example of them notwithstanding that the expected net benefit if the litigation succeeded was not significant. Furthermore, history now shows that it was an expensive failed exercise on the part of the ATO because it was ordered to pay Mrs Bosanac’s legal costs in the three Courts, which no doubt will exceed $200,000, in addition to its own legal costs.

It is also noted that on 15 February 2022, Mr Bosanac became a bankrupt when the Federal Court made a sequestration order against his estate on the creditor’s petition presented by the ATO and Ian Francis, a registered trustee, became the trustee of his bankrupt estate. It appears that the ATO started the bankruptcy action against Mr Bosanac after its successful appeal to the Full Federal Court, which was subsequently set aside by the High Court.

It will be interesting to see what action, if any, Mr Francis, the trustee, will take against Mrs Bosanac. Presumably, given the High Court’s decision, he will not litigate the resulting trust principle.

However, consideration may be given to an action under Division 4A of the Bankruptcy Act, which is based on the principle of “unjust enrichment “.  It is on the basis that the value of the net equity in Mrs Bosanac’s Dalkeith property has been increased by the repayments made by Mr Bosanac of the loans secured over the property, which were used in her acquisition of the property. But such a claim would be restricted by the provisions of section 139CA of the Bankruptcy Act, to the loan repayments made by Mr Bosanac in the period starting four years before the commencement of his bankruptcy in late 2021, to the date the application was made to the Court. Therefore, it would seem that such a claim would be less than the above $200,000.

So it appears that in future, if a bankruptcy trustee wishes to assert that the bankrupt has a 50% or more interest in their matrimonial home registered in the sole name of their non-bankrupt spouse by way of a resulting trust, the trustee will need to convince the Court that there was a clear intention of the two parties that the property was to be registered in the sole name of the solvent spouse to avoid the creditors of the insolvent spouse.  They will also need to rebut the principle of advancement that there was no evidence that it was the clear intention of both spouses that the solvent spouse would become the sole registered owner of the matrimonial property.

Implications and lessons of the Bosanac case for your family home

The High Court’s ruling has the potential effect of reverting to traditional principles of asset protection by registering the matrimonial home in the wife’s sole name, thereby providing an effective barrier to prevent the trustee of the husband’s bankrupt estate from claiming an interest in his wife’s property.  This is on the notion that the wife holds a portion of her property on trust for her bankrupt husband.

For those husbands with financial difficulties and who may be facing bankruptcy, the Bosanac case provides a useful framework to assist in determining whether the circumstances of their ownership of their matrimonial property would provide an effective barrier to a claim by a trustee.

The Bosanacs had a history of purchasing properties for the benefit of one of the partners and assisting each other to qualify for finance to purchase the property.

Partners in a marriage should review the following:

  • The circumstances of the property purchase;
  • The registration of the bankrupt on the title of the property ie. sole proprietor, joint tenancy, tenant in common;
  • Whether the property had previously been registered in both names and then subsequently transferred to one partner (this is what happened in the Cummins case mentioned above);
  • The intention of the owners at the date of purchase and whether there were any documented agreements about those intentions;
  • Whether the bankrupt husband and his spouse had a history of assisting each other to purchase properties under similar arrangements;
  • What other properties are owned by the partners, and whether they are held jointly or solely;
  • The borrowers in the loan agreement, which is secured by the mortgage on the title;
  • The financial contributions towards the acquisition of the property and subsequent improvements to the property;
  • The level of separation of finances between the parties;
  • The respective income of each party;
  • Finally, if one of the partners would be considered by an authority or a trustee to have been insolvent at the time of the property purchase. A partner being insolvent could lead to inferences about the parties’ intention to purchase the property in the name of the solvent party to defeat claims by creditors in a bankruptcy.

Bosanac – applying the principles to protect your home

It is yet to be seen if the principles of the Bosanac case will be supported by future cases and the facts of each case could result in different outcomes in the Court.

The Bosanac case and the abovementioned Weston case may give some hints to possible avenues to more effective asset protection and future-proofing against a trustee’s claim against a property owned by one party:

  • Documentation created between the partners evidencing their intentions when one party purchases a property for their own benefit whereby there is a clear intention on the part of both parties that one party is to be the sole beneficial owner of the property and where there is no intention for the second partner to ever have an interest in the property.
  • Documentation to evidence the intention can include, preferably, a written agreement between the partners, such a Financial Agreement under the Family Law Act, which includes a statement that the non-benefiting partner is merely being a joint borrower in respect of any loans used to purchase the property, to assist their partner in the lender’s lending criteria.
  • Keep substantial assets and finances separate in every regard. This includes separate investment portfolios, real property, bank accounts for substantial holdings, businesses, and other dealings. The Court in the Bosanac case clearly stated that separate substantial assets provided a clear inference of the intention of the parties at the time the property was purchased.
  • If the parties intend to acquire property that is, and always will be, the property of one of the partners, then the property should be registered in their sole name and at no time registering in their joint names. That could be decisive in a Court deciding on a trustee’s claim to a beneficial interest in the property.

Conclusions

Insolvent debtors and their advisors ought to carefully consider the trustee’s potential claim in scenarios where the insolvent debtor is not registered on the title of a matrimonial home and what the potential claim could be.

Similarly, the partners could benefit from insights offered by the Bosanac case in their asset protection strategies, namely, future-proofing property against a trustee’s claim by deciding who should be registered on the property’s title and separating their financial affairs generally.

The Bosanac case did more than just clarify equitable trusts concepts in property. It also provided scenarios and tests to measure and assess a bankrupt’s exposure to a trustee’s claim on properties owned by their spouses.

A professional advisor or solicitor will often be confronted with the difficult decision of providing advice to insolvent clients facing financial hardship who risk losing their family home.

Knowledge of the factors influencing a trustee’s claim to a beneficial interest in the property will benefit professionals by enabling them to provide their clients with an accurate prognosis on the likely consequences of bankruptcy and the potential risk of losing the family home.

Advisers and solicitors should familiarise themselves with the principles of resulting trusts, the presumption of advancement and constructive trusts to better assess the trustee’s claim and the overall consequences of bankruptcy.

If you would like to discuss your or your client’s concerns about the implications of bankruptcy on family property, please contact Anthony Bagala at dVT Group on (02) 9633 3333 or by email abagala@dvtgroup.com.au.

dVT Group is a business advisory firm that specialises in business turnaround, insolvency (both corporate and personal), business valuations and business strategy support.

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dVT Group is a business advisory firm that specialises in business turnaround, insolvency (both corporate and personal), business valuations and business strategy support.

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