Felicio Law Firm

Probably the most common situation where someone guarantees a loan taken by another person is that of parents doing so for adult children who wish to buy a house.

In other situations, a person may be a guarantor for a business loan taken out by someone else.

In either situation being a guarantor for the loan – meaning you become legally responsible to the lender that you will pay back the loan if the person the money is lent to fails to make repayments – is an admirable thing to do, but also carries some pronounced risks.

Let’s take a more detailed look at some of the pros and cons of being a guarantor below. Before you agree to be a guarantor, however, or ask someone else to go guarantor on your loan, seeking professional advice from legal specialists with expertise in the rights and responsibilities of this role is essential.

What are the risks of going guarantor on a loan?

Before you agree to be a guarantor on a loan, you should ask yourself some searching questions. Becoming legally liable for someone else’s debt is a considerable burden, and could severely impact your own lifestyle and future.

Particularly in family situations, where a parent may take on the guarantor role to help an adult child take out their first home loan, emotion can sometimes cloud reason.

The key risks to be aware of are:

• Being liable for the entire loan, plus interest and fees, if the borrower can’t make the repayments and defaults. If you are also unable to meet the terms of the loan, the lender may proceed to repossess the asset/s you nominated as security for the loan, including your house.
• As a guarantor, your own ability to apply for a loan may be affected. You will be required to inform a lender of any other loans on which you are a guarantor.
• Should you as guarantor, or the borrower, be unable to meet the terms of the loan, your credit report will be adversely affected and your ability to borrow in the future may be impaired.

A guarantor also needs to consider the possible effect of a family member defaulting on a loan for which they are guarantor. The relationship may be irretrievably broken if the trust implicit in the arrangement is breached.

Guarantor on business loans

Whereas a family member will generally be the guarantor on a home or personal loan, partners, investors or associates are also commonly guarantors when someone applies for a business loan.

With this type of loan, the lender will generally need to be convinced that the guarantor has a genuine relationship with the borrower, an interest in the business and sufficient assets to guarantee the loan.

A residential or a commercial property would usually be considered a sufficient asset to be offered as security for the loan.

Where the loan is for a new business, the guarantor will generally be guaranteeing 100 per cent of the loan because the new business has no assets to use as security. If the loan is to purchase commercial property, the guarantor will usually guarantee a 30 or 40 percent portion of the loan.

Important final questions

As we mentioned earlier, a potential guarantor needs to ask some important questions before signing on to guarantee a loan.

Does your financial situation allow you to take the risk of losing the asset you have offered as security? Are there are other ways you could help achieve the aim of the borrower, such as loaning the money to them directly? How strongly do you trust the borrower to make the necessary repayments?

It’s crucial that before agreeing to be a guarantor, you examine the loan contract, business plan or any other relevant documentation the borrower needs to provide to the lender. The best advice is to treat the loan you’re guaranteeing as if it were your own.

The process can be time-consuming and involved. Expert legal advice from experienced advisers such as Felicio Law Firm is essential. Whether it’s a home or business loan you’ve been asked to guarantee, we can provide understanding and relevant guidance on how to approach the question.

For the majority of people, contracts are not a fun thing to deal with in life. For most of us, they’re just small print.

Therein, however, is the danger. Many people entering into a contract find themselves in a difficult situation when a problem arises, such as one party not fulfilling their end of the deal or where there is some other dispute. If the issue is not dealt with in the contract, or not expressed to be in your favour, then you may be in a weak position with no recourse.

This situation can be particularly common in domestic building contracts. In their enthusiasm to have their renovation started, or their new house built, people often skim the details of the contract with the builder and are left in a vulnerable position if a dispute or disagreement emerges.

This article will look at the essentials of domestic (rather than commercial) building contracts in NSW and Queensland, where Felicio Law Firm has a proud track record advising clients over many years on what they need to know before putting pen to paper on this type of contract.

Essential things to know about building contracts

Unlike the old days, relevant statutory organisations such as Fair Trading NSW now provide ‘model’ plain English contracts which make it easier for consumers to access guidance on what a building contract should and should not include.

In any building contract, some key things to take note of include:

• That the contract is written in clear English; states the names and addresses of the parties to the contract; includes the builder’s current registration and/or licence number.
• The contract sets out all the terms relating to the building, including detailed descriptions of the work to be carried out, plans, specifications and any other relevant documents.
• That special requirements and finishes used in the building are set out and specified. Ideally, fixtures and fittings are also detailed in the contract, including their costs, as ‘prime cost’ items. If their nature and price are not yet known, they should be included as ‘provisional sum’ items.
• States the total price for the works, including the amount of the deposit and any schedule of progress payments (including ensuring progress payments relate to work completed and not time on the job).
• That the date on which the contract becomes effective is stated, as well as a clause about the cooling-off period. It should also include state a start and a finish date for the work, with allowances for delays.
• A section defining words and key phrases used in the document.
• Details on any implied warranties, including their duration.

NSW building contracts

In NSW contracts relating to residential building are governed by the Home Building Act 1989, whether you’re building a new home, or altering or renovating an existing one.

Any such project valued at more than $5000 requires a contract. Even for building projects valued under that amount, you should consider a contract or written agreement.

Building projects valued between $5000-$20,000 can be covered by a ‘small jobs’ contract. These contracts contain most of the points covered above, including the details of both parties; the contractor’s licence number; detailed descriptions of the work, including plans and specifications; and a contract price, if known.

This type of contract in NSW should also have clauses relating to:

• ‘Quality of construction’, which states that the proposed work will comply with the Building Code of Australia, as required under the Environmental Planning and Assessment Act 1979.
• Other relevant codes, standards and specifications that the project must comply with.
• The conditions of any relevant development consent or complying development certificate.
• Limitation of the contractor’s liability for failure to comply with work compliance clauses because: a design or specification prepared by or on behalf of the home owner (but not the contractor); or a design or specification required by the home owner if the contractor has advised the home owner in writing it goes against the ‘work compliance clause’.

A more detailed written contract is required for work costing more than $20,000. It should include all the details included in a small jobs contract, as listed above, as well as:

• Relevant statutory warranties required by the Home Building Act 1989 (such as that the work be done with ‘due care and skill’).
• The contract price, including warning provisions where the price is subject to change or is not known.
• A prominent clause about the cooling-off period of five clear business days for both parties once the contract has been received, for contracts valued over $20,000.
• A checklist of essential matters to tick off, such as the contractor having a current licence, details of when variations can be made to the contract, the costs of insurance or another indemnity scheme, termination clauses, etc.
• A progress payment schedule, covering fixed payments, interval payments or a combination of both.
• A termination clause.
• A note that the contractor must give you an insurance certificate under the Home Building Compensation (HBC) Scheme.
• A clause that any variation to the contract or its plans and specifications must be in writing and signed by both parties.
• A clause that the work will comply with the Building Code of Australia, and all other relevant codes, standards and specifications that the work is required to comply with under any law.
• A clause limiting the liability of the contractor for failure to comply in certain circumstances.

A builder or tradesperson must give the owner a copy of the contract within five business days after it has been signed.

Queensland building contracts

In Queensland domestic building contracts are covered by the Queensland Building and Construction Commission Act 1991 (‘the QBCC Act’), which sets out contract requirements for the erection or construction of a detached dwelling (i.e. a single, free-standing home or duplex) or the renovation, alteration, extension, improvement or repair of a home, as well as for other domestic building work such as a driveway, fence or swimming pool.

QBCC provides standard form contracts, as do Queensland industry associations, or the parties can create their own, though if this latter course is taken, legal advice from experienced contract lawyers such as Felicio Law Firm should be sought.

Introduction of Schedule 1 B in the QBCC Act introduced two levels for domestic building contracts in Queensland – Level 1 contracts for jobs priced between $3301 and $19,999, and Level 2 contracts for those costed over $20,000.

Requirements in a Level 1 contract are similar to those for NSW contracts listed above. The contract must be in writing, dated and signed by or on behalf of the contractor and the owner; contain the names of the contracting parties including the name and licence number of the building contractor; a description of the contracted work; the contract price; the date for practical completion or how the date is to be determined; a copy of any plans and specifications; notice to the owner about cooling-off period rights; and clear identification of the site where the building work is to take place.

A fully signed copy of the whole contract must be given to the owner within five business days after the contractor enters the contract. Variations or changes to the contract after it is signed must be detailed in writing in a compliant variation document and approved in writing by the owner before the variation work commences.

Implied warranties in this contract include that materials must be new and suitable for purpose; work is carried out in accordance with all relevant laws, legal requirements and the plans and specifications; work is carried out with reasonable care, skill and diligence; and that a home will be suitable for occupation when the contracted work is finished. Breach of these warranties can result in legal action which must be commenced within the warranty period (i.e. within six years for a breach resulting in a structural defect, or one year in any other case).

A Level 2 contract for work valued above $20,000 includes all the same points for Level 1 contracts plus:

• Provision of the QBCC Consumer Building Guide to the owner before the owner signs the building contract.
• The start date (as well as a date for practical completion), or how it is to be determined, must be stated.
• Relevant statutory/implied warranties must be stated in the contract.
• The contract price (if fixed) and a price change warning (detailing provisions which could cause the contract price to increase or decrease) must be prominently featured on the first page of the contract schedule.
• Where the contract price is not fixed, the method for calculating the price including any allowances (e.g. for Prime Cost Items or Provisional Sums) must be stated in the contract schedule.
• Within 10 business days of work commencing on site, the contractor must provide a Commencement Notice to the owner stating the date work commenced on site and the date for practical completion.

The need for legal advice

While there is plenty of official guidance on domestic building contracts these days, it is always wise to ask for guidance from a law firm with many years’ experience advising clients on obtaining a contract that clearly establishes all of the responsibilities of both parties and also protects their rights.

Call Erina Lawyers today for further guidance on your domestic building contract. (02) 4365 4249.

An issue many people may be facing in these tough economic times – whether caused by the COVID-19 pandemic or other factors – is falling behind on their home mortgage.

Potentially losing your home is a frightening prospect for anyone and the situation is often exacerbated by the fact an individual is facing the power and resources of the major financial institution who lent them the money to buy the house.

This article is designed to give you the basics on what happens when your mortgage is in arrears and your financial lender takes action to possess or foreclose on the property so that they can satisfy your debt to it, including your rights and obligations.

You’re in arrears on your mortgage repayments – what next?

A borrower is in arrears as soon as they miss a mortgage repayment. Other than providing a reminder notice and perhaps offering a hardship variation of repayments so that the borrower can catch up on repayments, most lenders refrain from serious action on mortgages in arrears until 90 days have passed (usually equating to three months, or three mortgage payments missed).

At any stage once a borrower is in arrears, a lender may issue a default notice allowing the borrower 30 days to fix the default by making the missed repayments, or applying for a hardship variation. If the borrower takes no action within this time period, the lender has the right to seize and sell the mortgaged property in order to recover the whole debt.

The next steps will see the lender serve a statement of claim or summons on the borrower for the arrears, and/or the whole debt, and/or the possession of your home. You then have a set period to respond by filing a defence or lodging a complaint with the Australian Financial Complaints Authority (AFCA).

If you do not respond within the specified period, the lender receives a court judgment in its favour and may apply for a writ to take possession of the property. This is followed by a Notice to Vacate with details on when you will be evicted from the property.

Even if legal proceedings have been commenced by a lender to repossess a property, a person with a mortgage can enter into dispute resolution to try and achieve the best outcome in their circumstances, such as a good sale price for the home. This may constitute a financial hardship arrangement giving them time to sell the property. A negotiation on this basis may involve providing evidence to the lender that the home is on the market, such as a contract with a real estate agent, a marketing plan and ‘for sale’ ads for the home.

After a court judgment about repossession, the dispute resolution process is only available in very limited circumstances and expert legal advice should be sought.

The important difference between repossession and foreclosure

Many people are confused by the difference between repossession and foreclosure. While foreclosure is quite common in places like the United States, repossession is more common in Australia.

This is because foreclosure involves a court proceeding in which the lender applies to have the borrower removed as the title-holder of the property and itself substituted as the owner. With repossession, the lender obtains a court order to take over the property in order to sell it, but the title remains with the borrower.

Because foreclosure can be a lengthy and costly process, repossession of a property where the owner is in arrears is more common, particularly in Australia.

In order to repossess the property in NSW, the lender needs to obtain an order from the Supreme Court. If your property is tenanted, the tenant must be notified, however the court can still make the repossession order even though the tenant did not know about the proceedings.

Supreme Court orders for possession are enforced by the NSW Sheriff’s Office, who will serve the home owner or the tenant with a notice giving the tenant at least 30 days to vacate the property. If you do not move out within this period, the Sheriff can remove you from the property.

What are your options once the property is repossessed or foreclosed?

If your property is repossessed by the lender, it is possible to apply for the judgment to be set aside in some circumstances, provided you can provide a good reason for not stating a defence earlier and you have a cross-claim against the lender. The guidance of legal representatives with experience in mortgagee repossession is vital here.

You can also seek a stay of enforcement of the court order in order to gain more time to sell the house, refinance, or find alternative accommodation. It may even be possible to negotiate a hardship variation with the lender if you’re granted a stay, which are generally only granted for short periods.

Property sale and the place of mortgage insurance

The lender has certain obligations to the property owner in selling the repossessed property.

Specifically it must:

• take reasonable steps to sell the property at market value;
• act in good faith;
• not recklessly sacrifice the interests of the title-holder.

While the lender must account for the sale of the property, it does not need to keep the title-holder informed about the progress of the sale, nor does it have an obligation to improve the property for sale. It may also charge you for its reasonable costs in taking possession of the home and the sale process. These costs can be challenged if they appear unreasonable.

After sale, any money in excess of the loan amount will be forwarded to you as the title-holder. But if the sale of the property results in a shortfall on the loan amount, you are still liable to the lender for the amount owed, including interest, costs and fees.

If you took out mortgage insurance with the lender when the home loan was negotiated, the insurer will pay this shortfall to the lender but also seek reimbursement from you as the policy-holder. Without insurance, you will be pursued by the lender for the outstanding amount on the loan.

In this situation you may need to apply for a release from the debt on compassionate grounds or by citing long-term financial hardship. A repayment plan or even filing for bankruptcy may be the most sensible options thereafter.

Seek expert legal advice

In real life, the steps outlined above are terrifying and stressful. For most people their home is likely their only major asset. To lose it is devastating.

At Felicio Law Firm we have years of experience helping people facing repossession or foreclosure when they fall behind on the mortgage. We can guide you through by providing realistic, workable solutions designed to achieve the best possible outcome in your situation.

Contact us today for an initial appointment on (02) 4365 4249.

Discretionary trusts are a legal instrument that offer control and flexibility in both holding and distributing property or other assets to beneficiaries of the trust.

There are also significant tax advantages for property and assets held in such a trust, which is one reason they are a popular structure for small businesses, particularly family businesses.

A discretionary trust – sometimes also referred to us a ‘family trust’ –invests in the trustee the power to determine the nominated beneficiaries of the trust and the discretion to distribute property and income to them in whichever amounts they choose. This means beneficiaries have no interest in the trust property unless the trustee exercises its discretion. The trustee is not held to predetermined arrangements or agreements about distributions, as in a fixed or unit trust.

Beneficiaries will usually be close family members, other family companies or charities. Significantly not all beneficiaries need to be included at the establishment of the trust; they can be added later under the trust instrument.

Below we’ll briefly outline the key advantages and disadvantages of establishing a discretionary trust. If you are thinking this structure may suit your circumstances, you should seek the guidance of a legal practitioner with expertise in the area of trusts to ensure you are fully aware of both the benefits but also the drawbacks.

The advantages of a discretionary trust

Asset protection: Property and assets held within a discretionary trust are held beneficially for the beneficiaries by the trustee. This structure means trust assets cannot be taken by creditors in bankruptcy proceedings, unless the claim relates to a debt of the trust.

Some discretionary trusts use a corporate structure in which the directors of the company act as the trustees. This form is preferred by some people because companies are perpetual and on the death of a director, a new director can be appointed without affecting the company. Even in this situation, property held by a company as trustee is not accessible by creditors in a liquidation of the company, unless the debt is a debt of the trust.

Estate planning: Generally speaking, the ownership of assets held in a trust cannot be passed on through a person’s will. But by making a testamentary discretionary trust under a will, which only takes effect on death, the trustee can exercise discretion in the payment of income and capital of the trust to the beneficiaries.

This is a strength of a discretionary trust to protect against the situation where a beneficiary is or becomes bankrupt. Where a person inherits assets in their own name, these pass to the trustee in bankruptcy. In a testamentary discretionary trust, the beneficiary’s inheritance is protected, provided they have not transferred wealth to the trust with the intention of defeating creditors.

Likewise that inheritance is in general protected in the event the beneficiary experiences a marriage or de facto relationship break-up and the ex-partner seeks access to the assets or income via a Family Court order, though it should be noted the Court may still consider any assets owned by the discretionary trust as a form of financial resource which could become a factor in the split of assets.

Tax effectiveness: Discretionary trusts can be a tax effective structure as a holding entity for investing in real estate, other fixed assets, shares or units in trusts. Income derived from these assets is held in the trust, which distributes it at its discretion in any particular year.

Each beneficiary pays income tax on his or her allocated share of income, according to his or her normal tax rate. In a simple discretionary trust held by a husband and wife, for example, if she earns much more than he does in a year and is taxed at the top marginal tax rate, it makes sense to distribute a greater share of trust income to the husband, who will be taxed at a lower marginal rate.

There is a significant capital gains tax advantage, too. If the investment is held in the trust for more than 12 months, any gain on the value of the investment is eligible for a 50% capital gains tax discount when it is sold, but only if the capital gain is distributed to an individual beneficiary.  Expert tax guidance from a tax lawyer or accountant would be required.

Flexibility: Beneficiaries can accumulate assets within the trust structure. Unlike superannuation funds, there are no contribution limits or restrictions on where to invest, unless specified by the trust deed.

Trusts can also represent a simpler reporting structure when it comes to tax liabilities, debt deductions and dividends on investments.

And the disadvantages…

Beneficiaries lack legal or equitable interest in property: Since beneficiaries do not own the assets of the trust, they do not hold a legal or equitable interest in trust property, meaning the trustee or trustees can employ their discretion to change allocations from the trust on a whim.

There may also be a restriction on who can be distributed to if you need to make a family trust election (FTE). An FTE entitles the trust to certain tax concessions when claiming losses from prior years or imputation credits on franked dividends received. Making an FTE, however, means family trust distribution tax is imposed when distributions are made outside the family group.

Only profits are distributed: Losses are trapped in the trust and cannot be distributed to a beneficiary in order to reduce their taxable income.

Complexity and compliance: Depending on whether your discretionary trust is a close family trust or uses a corporate structure, and the number of beneficiaries, the trust instrument can be complicated. There can also be onerous compliance obligations, particularly when it comes to taxation, adding to the administrative costs of maintaining a trust.

Attracting investment: Investors can be more difficult to attract to a business where a trust structure is employed. Banks who are unfamiliar with the terms of the trust deed may express hesitation about lending for investment.

Ask us for guidance

Whether a discretionary trust is suitable for your situation based on the factors we’ve outlined above is a decision you should consider after expert legal advice.

At Felicio Law Firm, we have years of experience advising people on both the benefits and potential drawbacks of establishing a discretionary trust for protection of family and/or business assets.

Call us Erina lawyers today on (02) 4365 4249 for an initial consultation in which we can fully discuss with you the implications of setting up a discretionary trust.

Trusts are a complex area of the law, particularly when it comes to taxation.

In NSW, when a foreign person – defined as an individual not ordinarily resident in Australia, a foreign corporation or a foreign government holding a substantial interest – acquires residential land in the state, ‘surcharge purchaser duty’ is payable by that foreign person. NSW residential land owned by foreign persons is also subject to ‘surcharge land tax’. Both these ‘foreign surcharges’ are payable in addition to any other duty or land tax payable.

Where a discretionary trust exists, the trustee may be liable for these foreign surcharges if any one of the potential beneficiaries of the trust is a foreign person. This applies to all potential beneficiaries under the various categories of beneficiaries provided for under the relevant trust deed, not just the named beneficiaries.

It’s a wise course of action to seek the advice of legal professionals experienced in the administration of trusts in order to avoid these foreign surcharges, which we’ll provide some more detail on in this article.

What a discretionary trust must do to avoid foreign surcharges

The NSW Commissioner of Revenue released a practice note in June 2020 on how surcharge purchaser duty and surcharge land tax is applied in situations where land is held by a discretionary trust, clarifying the application of section 104JA of the Duties Act 1997 and section 5D of the Land Tax Act 1956 to this situation.

The advice noted that potential beneficiaries of a discretionary trust are not limited to those named in the trust instrument and can include members of any class of persons to whom, or for whose benefit, trust property can be distributed or applied when the trustee exercises its discretion. This can include beneficiaries who are not included when the trust deed is executed, including foreign persons for the purposes of the foreign surcharges.

In this circumstance, the trustee of a discretionary trust will be designated a foreign person.

The note advised that to avoid being a foreign trustee, the discretionary trust must ensure:

1. no potential beneficiary of the trust is a foreign person; and
2. the terms of the trust must not be capable of amendment in a manner that would result in a foreign person being a potential beneficiary. This is known as the ‘no foreign beneficiary requirement’ and is usually satisfied when the terms of the trust prevent any property of the trust being distributed to or applied for the benefit of the person.

Some examples

The Commissioner’s note provided a number of examples applying the provisos around discretionary trusts and foreign persons.

A simple example is where a couple maintain a family trust and have children who are the primary beneficiaries. Potential beneficiaries of the trust include future spouses and children of those children who are primary beneficiaries. To remain exempt from foreign surcharges, therefore, the trust must be amended to exclude any foreign beneficiaries and this amendment must be irrevocable.

In a similar example, potential beneficiaries may include children but also their spouses, grandchildren, aunts and uncles, and an Australian charity operating in Australia for the benefit of residents in Australia.

Even though there may be no existing foreign beneficiaries, the trust must still be amended irrevocably to exclude any future foreign potential beneficiaries.

In another example where the trust owns no land in New South Wales, the trust does not need to contain a prohibition on foreign persons being beneficiaries. But if the trust purchases residential property in NSW it will be liable for surcharge purchaser duty in 2020 and surcharge land tax for the 2021 tax year. To escape liability for foreign surcharges, again it will need to amend the trust deed to explicitly exclude potential foreign beneficiaries.

In some cases, the trust instrument will already exclude a class of beneficiaries, including foreign persons, and is not capable of amendment. In this case the trustee will not be liable for foreign surcharges.

In the circumstance where an Australian corporation enters into a contract for the purchase of residential property in NSW and the corporation’s shares are held in a discretionary trust, the company will be liable to surcharge purchaser duty if the trust does not contain a provision to exclude foreign beneficiaries.

It should be noted that corporations are considered foreign persons if a shareholder who is a foreign person has a substantial interest in it, including where a discretionary trust is the shareholder of the company.

Further examples are available for us to discuss with you in cases where general beneficiaries of a discretionary trust will only benefit after the death of the principal beneficiary, or if the trustee is liable for surcharge purchaser duty on a transfer of dutiable property that occurred before 24 June 2020, or after that date but before midnight on 31 December 2020. In the second case, the trustee will still not be liable if the terms of the trust have been amended before midnight on 31 December 2020.

Seek our advice today

If any of the issues in this article relating to liability for foreign surcharges by a discretionary trust need further explanation, please contact us today on (02) 4365 4249 for an initial consultation. We are specialists in family trusts and can advise you in a prompt and relevant fashion on what you need to do to avoid foreign surcharges.