At Mahoneys, our Commercial Lawyers are seeing a growing number of clients coming to us for help after being told by their bank that they can’t structure their personal and business affairs the way they’d prefer. With the right legal advice, you can adhere to the banks’ latest guidelines and still structure your financial affairs in a way that protects your personal assets in the event of unforseen circumstances negatively affecting your business.
Our team regularly assists clients in finding the right structure for their personal and business financial situation. Partner at Mahoneys, Antony Harrison, has previously addressed issues that medical practitioners should be aware of when structuring their business in a way that protects their homes in this article. Much of the guidance in that article applies equally to any sole trader or business owner who wants to ensure their personal finances are kept separate from the finances of their business (and in the event that something goes wrong, are kept out of the hands of a liquidator or bankruptcy trustee).
Protecting the family home
As part of considering asset protection, we often recommend that the family home be owned by the partner that carries the least risk. This ensures that any ongoing contributions to the mortgage are made by the same person to avoid clawbacks if the partner carrying more business risk is made bankrupt.
Recently, we’ve been approached by a growing number of clients who have been informed by their banks that they can’t structure their affairs the way they want to. Unfortunately, the banks often don’t do a good job of explaining why that is, and our clients were left scratching their heads until they came to us for advice. In the most extreme case of this, one of our clients was told that it would be ‘domestic violence’ for the family home to be solely in the name of one partner to the marriage!
The banks and asset protection
The Banking Code of Practice was introduced in 1993 to give guidance on what banks need to do to meet the standards of a responsible lender. As society has taken a heightened interest in social justice and corporate citizenship, the Banking Code of Practice has become more prescriptive, typically to protect the most vulnerable members of society.
In July 2019, amendments were made to the Banking Code of Practice to help limit financial domestic violence. If someone is asking for a loan for which they will apparently receive no ‘substantial benefit’, then red flags are raised. The definition of ‘substantial benefit’ in the Banking Code of Practice includes a situation where ‘you acquire a reasonably proportionate legal or equitable interest in assets purchased with the loan funds’.
The reasoning is clear – we want to protect people from being forced to guarantee the loans of their partners when their partner is the only one receiving a benefit. The unintended consequence is that, as a starting point, even if you are the major breadwinner in a relationship and you want to put the house primarily in your partner’s name, the bank might think that you’re a victim of domestic violence, and refuse to offer you a loan.
How to approach asset protection and financial structuring
There is much to consider when structuring your personal and business financial affairs in a way that will minimise personal exposure in the event something goes wrong with your business. The banks and the guidelines these institutions need to follow are one crucial part of forming a sound strategy. As with most things, where you can show that there’s a legitimate reason for the arrangements that you’re seeking, the bank will be more than happy to assist.
If you need assistance with asset protection or structuring your personal or business affairs, contact Mahoneys Partner, Antony Harrison, to find out what options are available for your individual situation on (07) 3007 3777 or aharrison@mahoneys.com.au
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