Don’t look a gift horse in the mouth – reconsidering gift and loan back arrangements

Key takeaways

  • A “gift and loan back” arrangement is a popular asset protection strategy that has been implemented in various forms for many years.
  • However, a recent decision of the Supreme Court of Queensland has cast a shadow on the efficacy of such an arrangement.
  • In some circumstances it should still be possible to implement an effective gift and loan back arrangement, however care must be taken to document it properly.


A “gift and loan back” arrangement is a popular asset protection strategy that has been implemented in various forms for many years.

At the heart of the strategy is a “high risk” person transferring the equity in their assets to a “low risk” entity, while retaining the legal title to the assets. Utilising this strategy generally avoids tax and stamp duty consequences as there is no change in the ownership of the assets.

However, a recent decision of the Supreme Court of Queensland has cast a shadow on the efficacy of such an arrangement.


Before we look at that Supreme Court decision, let us consider an example.

Assume a situation where John owns a house valued at $3 million and there is $1 million owing on his mortgage, giving him $2 million in equity. John is a company director and is concerned about the risk of being sued for insolvent trading or pursuant to personal guarantees he has provided. John wants to protect the equity in his house from creditors.

John implements a “loan and gift back” arrangement as follows:

  • John gifts $2 million to The Smith Family Trust (a low-risk trust controlled by John)
  • The Smith Family Trust loans $2 million to John and takes a (second) mortgage over John’s house.

The result of that arrangement is that there is no equity left in John’s home. If a creditor was to sue John and the house was sold, the proceeds would be divided between the bank and The Smith Family Trust. There would be no money left for the creditor. As John controls The Smith Family Trust, John would effectively retain the $2 million in equity.

As a general rule there are also no tax or duty consequences because there is no “disposal” or “transfer” of the house by John.

That said, like many legal arrangements regarding asset protection, there are ways the best plans can be undone.

Re Permewan

The recent decision of Justice Cooper of the Supreme Court of Queensland in Re Permewan No. 2 [2022] QSC 114 illustrates some of those ways.

In Re Permewan, Prue gifted $3 million to a trust controlled by her (Lotus Trust). As Prue did not have $3 million in cash to actually gift to the trust, the gift was effected by way of a “promissory note”. A promissory note is document that contains a promise to pay a third party (or the holder of the note) a sum of money on demand or at some future time. There are a number of technical requirements regarding their execution and delivery that must be strictly followed in order for them to be legally effective.

The trust then loaned $3 million back to Prue and took security over Prue’s assets.

The effect of the arrangement was that Prue had no equity available in her assets, and therefore effectively no estate to distribute when she passed away.

After Prue passed away, her two daughters (who were excluded from Prue’s Will) challenged the gift and loan back arrangement as part of family provision applications they had brought against Prue’s estate. The third child, Scott, was the sole beneficiary of Prue’s will and also controlled Lotus Trust.

Ultimately Scott conceded that the promissory note had not been “delivered” as required by section 90 of the Bills of Exchange Act 1909 (Cth), and as such remained “incomplete”. Consequently the $3 million had not been gifted to the trust, meaning the trust never had $3 million to loan back to Prue and the security taken by the trust did not secure anything. Accordingly the arrangement was unenforceable. This meant the entirety of Prue’s $3 million asset pool was exposed to the family provision applications.

In light of that concession and conclusion, Scott submitted it was unnecessary for the Court to consider the other bases upon which it was said the arrangement was unenforceable. The Court disagreed and went to on find that there were two other bases upon which the transactions were almost certainly unenforceable.

The first was that the arrangement was contrary to public policy. That was on the basis that the arrangement was illusory and its sole purpose was to ensure there was little, if anything, left in Prue’s estate, in order to thwart the daughters’ family provision applications. Accordingly the arrangement was contrary to the public policy underpinning the law regarding family provision applications.

The second was that the arrangement was a sham. Contrary to the terms of the promissory note, Prue never intended to pay the $3 million to the Lotus Trust. Furthermore, Lotus Trust never had any intention of receiving (nor seeking to enforce the payment of) the promissory note.

Takeaways from Re Permewan

There are some key takeaways from Re Permewan.

First, compliance with the technical requirements for execution and delivery of promissory notes is critical, and non-compliance means the arrangement is incomplete and ineffective.

Second, even if those technical requirements are met, the use of a promissory note to affect the gift is likely to be considered a sham. This issue can be overcome by ensuring cash is gifted (and then loaned back) by actually transferring the cash between the relevant bank accounts. In the event the “high risk” person doesn’t have sufficient cash available, consideration should given to borrowing sufficient cash in order to make the gift. While a traditional loan may not be appropriate, enquiries could be made with the client’s financier to see if they are able to facilitate the transaction. If all bank accounts are held with the financial institution they may be able to arrange for an appropriate round robin of immediate successive electronic funds transfers. Mere journal entries without an actual transfer of cash should be avoided.

Third, there is a risk that the gift and loan back arrangement is void against public policy. In re Permewan the issue was that the arrangement was void against the public policy upon which the law regarding family provision applications. That a promissory note was used, and that the arrangement was not intended to take effect during Prue’s lifetime, appears to have contributed to that conclusion. A distinction was drawn with the situation where a deceased had not entered into such an arrangement but had divested themselves of their assets before their death by transferring them to third parties – such a situation would generally not be void against public policy.

What is yet to be seen is whether such an arrangement could be void against public policy in a bankruptcy context – i.e. where the “high risk” person has entered into such an arrangement and becomes bankrupt. However, in the context of the voidable transactions provisions under the Bankruptcy Act 1966 (Cth) (discussed further below), it is perhaps unlikely that such an arrangement would be considered void against the public policy of the Bankruptcy Act in circumstances where the Bankruptcy Act contains specific provisions to “undo” transactions entered into that seek to defeat the policy of the Act.

Other issues

There are some other issues to consider.

As noted above, there are voidable transaction provisions contained in the Bankruptcy Act. Section 120 provides that where property of a person is transferred at an undervalue less than 5 years before they became bankrupt, the transfer is void. Section 121 provides that a transfer of property to defeat creditors is void if it was entered into at any time. Both of those sections could be used to undo the arrangement.

There are also issues of the person lacking capacity, engaging in unconscionable conduct or being unduly influenced. Any of those matters may result in the arrangement being unenforceable. Advisors should be alert, especially with elderly or vulnerable clients, to be on the lookout for a lack of capacity, or of taking instructions from a relative or other third party. Documenting the advice and the client’s understanding is important.

The loan from the low risk entity to the high risk person is often on uncommercial terms whereby no interest is payable and the repayment of principal is not required until sometime well into the future. Having the loan on commercial terms may assist in resisting any claim that the arrangement is a sham.

Finally, a gift and loan back arrangement should not be considered in isolation. The client’s broader objectives and structure should always be considered. It may be that other arrangements could be utilised to achieve the same result but with less risk. While they may lead to tax or duty consequences, those costs must be weighed up against the risk of the arrangement coming undone.


Gift and loan back arrangements are not dead. But, it seems the use of promissory notes to effect such arrangements is. They are not an “off the shelf” solution and should only be implemented after consideration is given to the client’s broader objectives and structure.

If you would like advice around gift and loan back arrangements, please contact me at or 07 3220 1144.

The information in this blog is intended only to provide a general overview and has not been prepared with a view to any particular situation or set of circumstances. It is not intended to be comprehensive nor does it constitute legal advice. While we attempt to ensure the information is current and accurate we do not guarantee its currency and accuracy. You should seek legal or other professional advice before acting or relying on any of the information in this blog as it may not be appropriate for your individual circumstances.