Stamp Duty versus CGT — whether to pay the State or Federal Government

As detailed here, my family is undertaking a subdivision project on land inherited from our grandmother/mother-in-law. Rockstar suggested I post in here about our financial structure for advice or scrutiny or experienced property investors. My brother is an accountant and is running through the numbers to make sure our current plan is the best course of action, but I post it here also for the forum's consideration.

The property in question in pre-CGT (by a long way), but has been held by the estate since 1999. I think the title is in mum and my bro's names (as executors), but the ownership is split five ways. Each of the five owners has lived in the house at some stage, although my brother and one sister own other properties in which they live. Mum has an IP, which was formerly PPOR before she moved to the current residence. My other sis and I currently own no other property. If we were to sell the house and land as is, we could each elect to claim it as PPOR for the period since 1999 and thus avoid CGT. This would mean that my brother and sister who own other properties would pay CGT upon sale of their properties for the period until the inherited property is sold (prorated), but could add interest and rates paid and costs of any improvements to their cost base.

However, if we were to subdivide the land in our own names, we would be deemed by the ATO to be carrying on the business of developing properties (I don't have the relevant links at hand, but read case studies on the ATO website some time ago). We would then be liable for CGT on capital gains made from the sale of the allotment from the value of the house and land as at 1999 (likely to be a lot; did some rough calculations of upwards of $45k based on a 30% tax rate). Instead, we can set up a unit trust or discretionary trust and transfer the property to the trust at current market value. We would thus avoid the CGT, but instead be liable for stamp duty on the transfer (around $20-25k). The trust would then carry out the business of developing the land and pay out the income to us as beneficiaries.

Mum will be buying a block of land off the trust on which to relocate the house to, and will have to pay stamp duty ($1.5 to 2k) on the transfer, and mum and I are think of buying another block for a joint duplex build, so we would be up for more stamps on that.

So, yes, it does involve a lot of transferring of things around, but at this stage it looks to be the cheaper option. It does mean the state gets more of a cut at the expense of the federal government.

Any thoughts?

Assuming that Grandmother died in 1999, no matter whether you subdivide the property or not, if you or who now has an interest in property sells the property, there will be a CGT event as person who now owns the property will be deemed to have received the property in 1999, so will have cost base of value of property in 1999.

If you are deemed to be carrying on a business, it wouldn't be a capital gain, but rather ordinary income. As it's ordinary income, you'll be liable for more tax as you don't have the option to reduce the assessable amount of profit by 50%.

You cannot claim any property as a PPOR unless you actually owned it AND lived there at one stage as your PPOR.

Your grandmother would have owned it until her death in 1999, after which it appears to have been held by the executors of her estate. CGT will be payable on the increase in value from 1999.

It is hard to see how five siblings could claim one house as their PPOR. From the previous post it appears there is only one house on a large piece of land.
Marg

I agree that you can not claim the property as PPOR as you need to actually own it and establish it as you main place.

Seems like you or your Sis don't own it and may not have established a residential history at the premises.

Cheers

Does ownership have to be established on the title deed for it to be a PPOR? I wouldn't have thought so, otherwise not only could I not claim the PPOR exemption, but I also shouldn't be liable for the capital gain. Surely the same rule applies to both, so that if I am deemed an owner and hence liable for CGT, I can also claim as PPOR and hence be exempt? Or is the alternative that capital gains tax is only liable for those on the deed (mum and brother, as executors of the will)—which would actually be better because then sis could claim PPOR on her current property?

Pickle pickle, yes, I realise now that the pre-CGT part was a bit of a red herring. The property is deemed to be received at date of death (unless the above argument holds because the deed wasn't changed?) and this is the first CGT event. And yes, subdividing also puts in on the income account, meaning upwards of a $90k tax bill on the capital appreciation part of the development proceeds, before counting the tax on the value added by the development (which we can't avoid in any case).

We did not all live in it at the same time, but have all lived in it as PPOR as different stages. Mum and two sisters moved in soon after date of death. One sis moved out when she got married. Brother moved back in home after finishing uni, and then moved out with some mates, and then moved back and lived in it with his wife until about 2 years ago. I moved back from overseas about 18 months ago and moved in, and then mum and unmarried sis moved in as well late last year after returning from travelling around the country. I believe you do not have to live in it for the complete period to claim it as PPOR, so long as you are not claiming PPOR on another property and have not earned income or claimed tax deductions on it as an IP while not living there. The property has never been rented out.

brendio said:

Does ownership have to be established on the title deed for it to be a PPOR? I wouldn't have thought so, otherwise not only could I not claim the PPOR exemption, but I also shouldn't be liable for the capital gain. Surely the same rule applies to both, so that if I am deemed an owner and hence liable for CGT, I can also claim as PPOR and hence be exempt? Or is the alternative that capital gains tax is only liable for those on the deed (mum and brother, as executors of the will)—which would actually be better because then sis could claim PPOR on her current property?

No you don't need to own it for a property to be your principal residence (in which case its just words as has no tax meaning). Unfortunately, for consideration of the CGT excemption you do need to be on title and have the property needs to have been the title holders PPOR.

Pickle pickle, yes, I realise now that the pre-CGT part was a bit of a red herring. The property is deemed to be received at date of death (unless the above argument holds because the deed wasn't changed?) and this is the first CGT event. And yes, subdividing also puts in on the income account, meaning upwards of a $90k tax bill on the capital appreciation part of the development proceeds, before counting the tax on the value added by the development (which we can't avoid in any case).

We did not all live in it at the same time, but have all lived in it as PPOR as different stages. Mum and two sisters moved in soon after date of death. One sis moved out when she got married. Brother moved back in home after finishing uni, and then moved out with some mates, and then moved back and lived in it with his wife until about 2 years ago. I moved back from overseas about 18 months ago and moved in, and then mum and unmarried sis moved in as well late last year after returning from travelling around the country. I believe you do not have to live in it for the complete period to claim it as PPOR, so long as you are not claiming PPOR on another property and have not earned income or claimed tax deductions on it as an IP while not living there. The property has never been rented out.

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You might still be able to claim a part exemption to CGT depending on when your Mother (who you indicate is on the title) lived there and established it as her PPOR. From the time she moved out until she established herself in another (owned) PPOR there is a 6 year window. So say she moved in on aquisition and didn't move out until 2004 and then went and rented a property (I know you indicated that she move into one of her IP's) until now then the said property would still be her PPOR for CGT purposes and be excempt.

My understanding is that you can rent out and claim deduction on a PPOR within that 6 year window as long as you don't establish another PPOR.

I would imagine that another complexity which may impact the CGT is the co ownership with one or the other owner having other PPOR at different times.

Maybe ther is an area that creates a loophole as I get the impression that everybody owns the proeprty but everybody is not on title. Is this documented or is this not the case. If it was documented namely in the will but never recorded on title then effectively your mum and bro have held property in trust. This could be a further twist that offeres some oppurtunity.


You really need to speak to your accountant.

Cheers

handyandy said:

You really need to speak to your accountant.

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Bro is the accountant, and I believe I represent his view on the case, but we will of course also be seeing solicitors in the near future to make sure of everything. Yes, the will (never personally seen it) stated that ownership was to pass to all.

So, right now, who is the official owner of the property (i.e., name on title)?
Marg

I believe it is mum and bro on the title, as that is who the rates notices are addressed to. But as handyandy says, in that case the property is effectively held by them in trust for us all. They can't sell it and pocket the money themselves. I think this lies in the difference between legal control and beneficial ownership:

Legal control is legal title only. A person with legal control can buy and sell an asset but will never own or enjoy the benefits of ownership (such as income or usage).

Beneficial ownership on the other hand allows a person to enjoy the benefits of ownership (including; usage, income, profits etc) even though legal title is in another name.

(from http://www.flyingsolo.com.au/p21401...Saving-through-the-other-deductible-rule.html)

So mum and bro have legal control as executors of the will, but all of us have beneficial ownership. Will need to do some more reading on this.

Some more from the above mentioned link:

In the case of a loan one may have legal control by having their name on the loan but somebody else might have Beneficial Ownership. This means that the beneficial owner is the one who can claim the tax benefits of the investment loan, the legal owner cannot. Here’s an example:

John helps his son, Toby, buy an investment property. The loan is in John’s name but Toby is paying the mortgage. In this case Toby is the beneficial owner of the property; he is the one who will receive the negative gearing benefits. John simply has legal title and doesn’t receive any income or ownership benefits at all.​

Separating control and ownership can be as simple as a handshake or as detailed as a trust deed. The methods used each have their advantages and disadvantages.

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handyandy said:

I would imagine that another complexity which may impact the CGT is the co ownership with one or the other owner having other PPOR at different times.

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Yes, each can have only one PPOR at a time, but the choice does not need to be made until either property has a CGT event or is first used to derive assessable income. This is not yet the case for bro and sis, so they have the choice to claim PPOR exemption on this property and be liable for CGT on their other residence until this property is sold or transferred to a trust. The CG is prorated over the period of time claimed as non-PPOR and time as PPOR.

Example:
Bought in 2006.
Inherited property (claimed as PPOR) transferred to trust in 2010, and they begin claiming other property as PPOR.
Sell in 2012. They pay CGT on 4 years/6 years or 66% of capital gain (approximately; real calc should use number of days).

They can also add interest and council rates to their cost base to decrease the amount of capital gain that is taxable. So for them it is a matter of weighing up the likely CGT liability on each property if they do not claim PPOR exemption. As the inheritance property is debt-free and has been held for a longer period of time, whereas they can capitalise property expenses to the cost base of their other properties, they are better off claiming PPOR on the inherited property.

Quite a lot of issues ... so here is only a couple of points:

1) If your subdivision does not involve too intensive and commercial activities by the trustee/beneficiaries then this may be something less than ordinary income from a business or speculation.

You inherited the land, so it was not acquired for resale at a profit. You might be deemed to be carrying out a profit making scheme under s.15-15. Therefore CGT should apply because it relates to land acquired after Sept 19 1985.

2) Main residence exemption can be claimed whilst the estate is being administered where the house is occupied by a beneficiary or somebody with a right to occupy under the will (and they don't claim another PPOR).

3) I presume that this is not still the original estate under administration (you mentioned executors), otherwise most likely you are way out of time and any income (& CGT) will be taxed to the Trustees at the top rate.

I presume you mean that the property is held on a testamentary trust for the beneficiaries, with your mum & brother as trustees ?


Of course this is only supposition based on your incomplete facts. You need to consider other laws and not just tax.

Cheers,

Rob

Rob G. said:

3) I presume that this is not still the original estate under administration (you mentioned executors), otherwise most likely you are way out of time and any income (& CGT) will be taxed to the Trustees at the top rate.

I presume you mean that the property is held on a testamentary trust for the beneficiaries, with your mum & brother as trustees ?

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Do you have a reference or link for this? Why are the trustees taxed at the top rate? Way out of time for what? The two year limit? I realise we do not meet that condition, but we do meet condition 2 for both executors. It seems people are suggesting that for tax purposes it will be treated as property of the executors. If this is the case, and they can still claim PPOR exemption, we may actually be better off, but I would need to see backing up in the legislation.

AFAIAA, there is no testamentary trust specifically set up.

Is this what your were referring to about being tax at the top rate? However, I think this only applies to income.

It applies to "net income of the trust".

This includes net capital gains.

Where the property passes to a beneficiary under a will, any capital gain to the Trustee is normally ignored.

However, if the Executor enters into a joint venture with the beneficiaries to develop the land before it is distributed to the beneficiaries as part of an estate there is a danger
that the exemption may not apply.

You need to talk to a specialist in this area.

Cheers,

Rob

Found out why the title is only in two names: The will stated that the bequeathed assets were to be held in trust until the beneficiaries were 21. My sisters weren't at the time, so they couldn't be put on the title. I'm not sure why I'm not on it, as I was 21 at the time. So, it shouldn't be a problem, although we will double check.

One of our solicitors was talking to my brother yesterday about some of his tax stuff, so brother was able to get some info from him about the legal costs of setting up the various trusts and corporate trustee.

Update

Just an update on this issue, in case anyone was wondering (I hate threads that are left hanging), we are in the process of getting the title transferred over from mum and bro (as personal representatives) to all five of us. We need to take our birth certificates (and sis her marriage cert) into the solicitors to show that we are over 21, as this was a condition of the will (and the reason why it was not in all ours names to begin with).

Us as personal owners will then enter into a contract with us as development trust for the trust to purchase the property subject to getting DA, finance and with some very generous timeframes for this to occur. That way, the trust can carry on the business, but we will not be liable for the stamps until settlement and can pull out beforehand and save on stamps if the DA gets knocked back or we can't get finance and have to sell with DA to a developer.

Keep an eye on the other thread to see how it all progresses.