22 Sep Presumption of Advancement – The Importance of Documentation in Property Purchases
In Australia one the most common assets held by individuals is real estate, and in particular the family home. As a result, when administering bankrupt estates it is common that Trustees are required to deal with real property and the competing interests in the property held by the bankrupt and other parties, often family members.
Recently SV Partners has dealt with a number of bankrupt estates where family members of the bankrupt have claimed an equitable interest in the property, however no documentation existed to formalise the equitable claims of the family members. This failure to document the intentions in relation to the property in question resulted in the family members losing any rights to equity in the property.
This leads us to consider the presumption of advancement. When particular relationships exist between parties (e.g. husband and wife), the purchase of property by one party (e.g. a husband) in the name of another party (e.g. a wife), will be considered a gift. In these circumstances a resulting trust will not arise and the presumption of advancement will apply meaning the interest in the property will be considered a gift, unless evidence to the contrary can be provided (the importance of documenting intentions).
Common relationships where the presumption of advancement may apply:
- Husband and wife;
- Individual and his/her fiancé;
- Defacto couple; and
- Parent and adult child.
Despite the presumption of advancement applying to many types of relationships it may be rebutted where evidence can be provided to demonstrate that the purchaser did not intend for the property to be a gift to the other party. The onus of rebutting the presumption of advancement lies with the party who is considered to have gifted an interest in the property to another (usually the purchaser). The evidence must show at the time of purchasing the property, not at some later date, it was not intended that the interest in the property provided to the other party was a gift.
Two recent examples encountered by SV Partners are discussed below.
Case Study One
A wife who held a joint interest in property with her husband became bankrupt. The wife had an ongoing relationship with her husband so no family law issues arose in the course of the bankruptcy.
The bankrupt wife and her husband each held a half interest in the family home which we determined held significant equity. The husband claimed the bankrupt wife’s contributions to the property were limited and he had funded the initial purchase of the property in full and for this reason argued the bankrupt wife’s interest in the property was negligible.
We invited the husband to provide documentation formalising the intention that the interest in the property provided to his wife was not a gift which he could not do. As a result, the husband was required to purchase the bankrupt wife’s 50% interest in the property from the bankruptcy Trustees.
Case Study Two
The second example is a relationship between parents and an adult child. In this instance, the adult child became bankrupt and again held property. The adult child was the sole owner of the property and following his bankruptcy we concluded equity existed in the property which would need to be realised for the benefit of the bankrupt estate.
The bankrupt’s parents notified us they had funded the deposit required to allow the bankrupt to purchase the property. We obtained documentation from the bankrupt’s parents which confirmed they had funded the deposit required to purchase the property, however there were no formal agreements regarding the provision of the funds.
As the presumption of advancement could not be rebutted this left the parents in a compromised position. At best the parents were left being able to submit a claim as creditors of the bankrupt estate instead of being entitled to an equitable interest in the property.
These examples demonstrate that the presumption of advancement can have a significant impact when dealing with property in a bankrupt estate. For this reason it is critical that appropriate documentation and agreements are entered into where funding for the purchase of the property is being provided by family members.