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Monthly Archives: July 2019

Indefeasibility and the Torrens System

I don’t advise on property law, but this topic is relevant to asset protection.

The Torrens system of registration of title for real property was first introduced in the late 1800 and it has slowly been replacing the existing system since then. The existing system of title is known as ‘old system title’ and it was complex and cumbersome.

In old system title when a property was sold the ownership had to be proved by both the physical title and locating all the previous transfers relating to that title. Sometimes documents went missing and it was a real pain in the arse being both time consuming and costly.

Torrens was introduced as a system of registration to replace all of this. The name registered on title was the legal owner. This is enough proof.

Indefeasibility refers to the fact that what is registered on title is proof. So, a registered owner is proof of legal ownership. A registered mortgage is proof of the legal mortgage. It is said to be a ‘system of title by registration’.

But this doesn’t mean registered ownership takes priority in all cases.

An example is fraud. Where title to a property is fraudulently transferred to someone else then them being registered owner does not mean it is indefeasible. This can happen with mortgages too. There is a recent case where one spouse mortgaged a jointly owned property to borrow money by forging the signature of their spouse. Since this was fraudulent the lending bank could only recover half of their money.

Keep in mind that there are also unregistered or equitable interests. The legal owner may not be the beneficial owner of a property. This happens where they are acting as trustee under an express trust, such as a discretionary trust, or where a trust is implied such as a resulting trust. In these cases the courts will enforce transfer of title based on equitable grounds.

Then there claw back provisions in various legislation such as

  • S 37A of the Conveyancing Act NSW (and other state equivalents)
  • S 120 to s121 of the Bankruptcy Act
  • Family Law Act
  • Succession Acts

Title of a property might be held by person A but the courts can reverse this and transfer it to person B and then to creditors, spouses, missed out beneficiaries etc.

So, in summary, indefeasibility does not mean a property dealing cannot be attacked, but it is evidence of the current legal ownership of property.

Discuss at https://www.phttps://www.propertychat.com.au/community/threads/legal-tip-223-indefeasibility-and-the-torrens-system.40248/ ropertychat.com.au/community/threads/legal-tip-223-indefeasibility-and-the-torrens-system.40248/

Electronic Signing of Deeds – Don’t!

I have recently come across a client who had their trust deed signed by the settlor, electronically. The settlor had inserted a jpeg of her signature in the deed and emailed it to the client for signing. There was no original copy. It was also electronically signed by the witness of the settlor. It is not known if the witness was present with the settlor when it was signed, or if they signed the same document.

This deed would fail. It is not executed.

Another client had their deed signed by the accountant who set the trust up, but it was also witnessed electronically – one of the accountant’s witnessed the client’s signature. Interestingly signatures were ‘witnessed’ from afar!

This deed also fails.

Deeds cannot be signed electronically in any state of Australia. There is one exception now due to recent amendments to the Conveyancing Act, s 38A, in NSW. This new legislation does allow for deeds to be signed electronically, from 2019, but the legislation does not cover side issues such as how can an electronically signed deed be witnessed? When 2 people sign a document on different computers they are not signing the same document so will this be valid?

Can companies sign electronically?

What happens when someone dealing with the trustee wants to see the original deed? If you were to print it out would it be original? How could a certified copy of the deed be made?

My tip: Do not sign any deed electronically, even if you are an individual based in NSW. Print out the deeds and sign with a pen.

If you have signed a deed electronically seek legal advice on how to rectify this problem, even if located in NSW. And don’t go back to the same firm that caused the problem in the first place as they are likely to not know about the issue or how to fix it.

Discuss at:

https://www.propertychat.com.au/community/threads/legal-tip-222-electronic-signing-of-deeds-dont.40226/

A Strategy to increase the Pension when Have Too much in assets

The assets test can prevent someone from getting a full or part aged pension. A way around this might be to ‘double dip’ by spending up to reduce your assets. But that is wasteful. Spending $150k wastefully just to get an extra $10k doesn’t seem to be wise (yet people actually do this!).

A better way would be to upgrade the main residence. But this is also wasteful in terms of suffering stamp duty and other costs – you will lose roughly 10% of the value in selling one house to acquire another.

Another solution is to build a granny flat or second dwelling in the existing house. This will use up a chuck of cash, but also add value to the property.

As long as the granny flat is not rented out, or family stay there it will be treated as a part of the main residence and there will be no income taken into account.

This could help a person both get the pension as well as help family out by allowing them cheap accommodation.

Section 11A(1) of the Social Security Act

As of July 2019 the assets test for a single pensioner is $258,500 for a home owner. That is a single pensioner can have assets of $258,500 or less, other than their home, and still get the full pension.

Example

Homer’s wife Marge just died and he is on a single pension. He has a $400,000 house on a large block as well as $400,000 in the bank. Homer could get a part pension only with his assets exceeding the assets test level.

His pension would be $12,836 per year

If he used $141,500 to build a granny flat the pension would jump to $22,509 pa

Using this great calculator: http://yourpension.com.au/APCalc/index.html#CalcForm

Homer uses $141,500 to build a granny flat in the back yard.

His pension increases by almost $10k per year.

He let’s his son Bart stay there and Bart helps around the home. Bart is now saving $300 per week on rent – so he is $15,000 per year better off.

If Bart moves out or if Homer ever needs more money he can always rent the granny flat out, but this would reduce his pension. If he rented the flat out for $300 pw he would get $15,000 pa rent plus $16,377 for the pension. $31,377 pa

He could also sell the property by about $180,000 more with the granny flat

So, all up building the granny flat has benefitted Homer in at least 4 ways:

  1. Larger pension
  2. Family close by
  3. Potential rental income plus part pension making more cashflow than doing nothing – more than $31,377 compared to $12,836
  4. Greater tax free capital asset for him and his family (if rented won’t be tax free completely)

SMSFs Negative Gearing

Not many realise but a SMSF can negative gear property, and even shares potentially.

It works the same way inside a SMSF as outside. Any loss from an investment can reduce the taxable income of the fund which saves tax on that income.

Example

A SMSF has a property with a $15,000 loss after all expenses are taken into account.

The member of the fund contributes $20,000 into the fund in the form of compulsory employer contributions. This is normally taxed at 15% which would be about $3,000 in tax.

But with the loss from the property the income of the fund becomes $5,000 (-$15,000 + $20,000 = $5,000).

The tax on $5,000 would be $750.

So, having the property would be saving the fund $2,250 in tax in that year.

Note that I am not suggesting that I think property in a SMSF is a good investment.

5 Different ways to Fund Retirement

Retirement can be funded from 5 basic classes of income/assets, which are:

  1. Income
  2. Capital gains
  3. Capital
  4. Borrowing
  5. Government pension

Income is the obvious one. You invest in shares or property and receive dividends or rents. You could also work if you had to.

Capital gains is also relatively obvious, but often not considered by the ‘never sell’ type.

Capital gains are often better than income because they are taxed at half the rate of income (using the 50% CGT discount). Capital gains can be obtained by selling longer term held assets such as shares or property.

Capital, or Corpus, is not usually considered directly, but many financial planners and government websites assume you will eat into your assets so that on the day you die you will have $1 in the bank. This is similar to capital gains, but different because you are eating into the original cash you have contributed to the investment there is no tax payable.

This could be cash in offset accounts – which can be a great way to fund retirement as where the offset is attached to an investment loan the increased interest will be tax deductible.

It could also be from the proceeds of shares of property after they are sold.

Borrowing is still possible, but it will be very unlikely most people will be able to utilise this in their retirement. One way to possibly do it is to borrow as much as possible just before retirement and to slowly use these funds. Another way is the reverse mortgage products.

One method rarely considered though is borrowing from children to fund your retirement. This can benefit both parent and child because instead of selling that property and losing future growth, paying extra tax etc, the child could lend you some money on the expectation of inheriting the property at a later date.

The pension is the backup strategy for many– government will fund your retirement if all else fails. Some can also get a part pension combined with part from one or more of the other classes above.

Note that I didn’t include superannuation as a separate category above, as income from super wil be in one of the above forms anyway.

Discuss at

https://www.propertychat.com.au/community/threads/5-different-strategies-to-fund-retirement.39972/

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