A change to the Bankruptcy Act, which forces the family home to be held in the names of both spouses from May 31, has been slammed by some advisers as having potentially disastrous consequences for clients.
Section 139EA of the Act, which came into effect on May 31, effectively places a family home under greater threat of confiscation by bankruptcy trustees in the event of one spouse going bankrupt.
“You can now no longer put the family home in the name of your spouse and expect your family to keep it if you go broke,” said Geoff McDonald, a partner at Hall Chadwick Chartered accountants and business advisers.
Also a barrister and registered trustee in bankruptcy, McDonald said the change could “cause monumental damage throughout the small business community”.
“Small businesses can fail for many reasons other than the direct fault of the business operator, such as fraud by an employee, or a large customer failing to pay, or rapidly changing market conditions,” he said.
“Under the new legislation, however, a whole family could suddenly be out on the street, ignoring the contribution to the financial wellbeing of the family from a spouse who tends to the home and looks after the children.”
McDonald said it “appears that these legislative changes may have missed their intended target”, adding that the Howard Government has “overreacted to recent media attention given to a few rogue barristers” who flouted the tax laws with impunity.
The family home is further jeopardised by a recent High Court ruling that holds property is owned equally by the two spouses, regardless of how it has been financed.
While the new legislation applies only to transactions taking place from May 31, the new court principle is a “greater worry”, McDonald said. “It applies to houses bought post-marriage at any time in the past.”
People will still be able to protect the family home from the new legislation by placing it in a family trust, he added, but only “at a significant cost” in the way of extra state and federal taxes.
The Association of Independently Owned Financial Planners (AIOFP) chief executive officer Peter Johnston said the legislation was the “equivalent to using a sledgehammer to crush a peanut” in terms of the Government’s attempts to “circumvent barristers cheating the Tax Department”.
Johnston said the new legislation would mostly affect “those financial planners who look after people who have a small business and who are teetering on the edge of bankruptcy”.
He added: “It will have an impact on the advice planners give their clients in these circumstances, but I would suggest that the impact overall on planners will be minimal.”
