Buying PPOR under a trust with CGT exemption

M

MiQu

Hi everyone.

I have been adviced by my accountant to buy our next PPOR in a trust, as both my wife and I are in high risk jobs. The main problem is with this (apart from the extra cost) is the CGT.

But apparently we could have a "long term Lease agreement" in place which would allow CGT (and land tax)exemption, should we decide to sell in the future.

I was wondering if anyone is familiar with this or heard of this? If so what does it involve and what are the implications?

Thanks. :confused:
 
Must admit never heard of the CGT exemption but you certainly will not get the land tax or stamp duty concession in Trust.
 
I'd get a tax ruling before trying anything like that. It just seems so against ATO rules regarding PPOR exemptions. I assume they're saying that that the lease agreement approximates all the substance of a PPOR, but the fact that the individual doesn't own the property.......
Alex
 
Agreed. A CGT exemption is only available for your own home. If its held in a trust, it aint YOURS. Technically, its owned by the trust for the benefit of its beneficiaries. I'd be VERY careful about this one, and check it out first.

There are other ways to protect your equity using trusts, such as borrowing against your property and gifting it to your trust, your trust creating second mortgages over your property etc. The high risk jobs are a pain, but there are other ways around protecting your ***(ets).
 
You can get a main exemption for a house owned in a bare trust, but that's a lawyer's department for answering, since the disposal of assets in a bare trust are deemed to be a disposal of assets by the beneficiary.

The gift and loan back strategy is worthwhile looking at as tubs is alluding to. Such a loan should have a mortgage registered against the title to prove it is an honest to goodness agreement, but beware of property increases that may take place later. Queensland is getting rid of mortgage stamp duty on 1 Jan 2009 so I'm sure a lot of people will be doing this around that time.
 
Thanks everyone for the input. Much appreciated.

The gift and loan back strategy sounds good. I presume with the revaluation every year or two(when values increase) you refinance to move more equity over to the trust as a gift to buy more assets in the trust?

If so, then you'd have a larger home loan each time and thus pay lots of non deductible interest?
:confused:
 
tubs said:
Agreed. A CGT exemption is only available for your own home. If its held in a trust, it aint YOURS. Technically, its owned by the trust for the benefit of its beneficiaries. I'd be VERY careful about this one, and check it out first.

There are other ways to protect your equity using trusts, such as borrowing against your property and gifting it to your trust, your trust creating second mortgages over your property etc. The high risk jobs are a pain, but there are other ways around protecting your ***(ets).
Click to expand...


Is anyone here actually doing this. It seems to me that the Land Tax costs are a fairly significant deterrant.
 
Hi Gang,

In regard to living in a property owned by your family (discretionary) trust there seems to be a number of issues which I have seen mentioned in the past:

Firstly, if you do this and don't pay rent then there is a possibly that Fringe Benefits tax is payable. I have never understood why - perhaps this may occur if the trustee is a company and the beneficiary living in the property is a director??

Secondly, to avoid having to pay Fringe Benefits tax you can choose to rent the property from the trust provided the rent is at market value. But then it has been suggested by numerous accountants and lawyers that the ATO would using Part IVA deem this to be a private arrangement and dissallow any standard rental deductions.

So it would seem, if you assumed the above to be true, that renting or living in a property owned by your trust is a no win situation. However it has also been suggested by other accountants and lawyers that it is possible given specific circumstances such as asset protection and others IPs existing in the same trust etc.

Unfortunately Part IVA didn't exist when the Janmor (from memory) case was successful and I don't think there has been any cases since to test this scenario.

Gordon
 
Mry said:
Tabone anyone?

He messed up on his execution, but the courts said Part IVA would have applied anyway.
Click to expand...

Hi Mry,

I have seen this case discussed previously but I thought it was to do with a Unit Trust arrangement and the defendents made a dogs-breakfast of execution to say the least. Any wonder they lost. I have noticed that since this case a few advisors now don't recommend using a Unit Trust (inc HDT) arrangement if beneficiaries want to rent a property throught a Trust structure. However there still seems to be some disagreement amongst advisors if the arrangement involves a simple Discretionary Trust and certain criterea are met.

Cheers - Gordon
 
But then you get left with a DT that accumulates losses that the individual taxpayers can't access, that will have a CGT bill later, no land tax exemption, and be positively geared some years down the track.

The gift and loan back strategy looks even better now.
 
So there's no problem renting an IP from your trust as long as it's held in a Discretionary Trust and you are paying full market rent?

What about a HDT without the income units issued? Wouldn't this be the same as using a DT?
 
I know that negatively gearing a property sounds attractive (except for the loss of the main residence exemption, loss of the land tax exemption etc), but the ATO looks at it this way-

Negative gearing tax benefits + you live in the house with the tax benefits = tax avoidance = apply part IVA (anti avoidance provision)

And they have been quite successful on this point.

You would have to prove that you are not seeking tax benefits but merely entering into a commercial transaction to rent the property, and this is close to impossible at this point. It is potentially feasible, but the ATO will challenge you anyway regardless of what you do to try to make it look squeaky clean.
 
Thanks for the response Mry. Personally I wouldn't be worried about losing the main residence CGT exemption because I wouldn't sell. And land tax is a pain in the **** but the other benefits of having the IP in the trust would probably outweigh that.

Do you know if anyone has applied for a private ruling on renting from their discretionary trust and been successful with the ATO? From the sound of your post it doesn't sound promising.

Interestingly, I've just pulled out my copy of Trust Magic (the chapter called 'Home Sweet Home' on page 51) which says:

'The Tax Office are currently looking at unit trusts owning your home, but, have shown no real interest in family trusts doing so since they lost an important court case in the 1980's.

One piece of magic to this idea is that providing you pay rent to the trust at commercial rates, the trust will be able to claim the interest on the mortgage and all the usual bills relating to property investment as legitimate tax deductions without triggering the nasty consequences of Fringe Benefits Tax.'

This is from my original copy of Trust Magic published in 2003. I haven't bought the updated Oct 2007 version yet so I don't know if Dale's view has changed since then. Can anyone confirm it is still in the new publication?
 
MiQu said:
Hi everyone.

I have been adviced by my accountant to buy our next PPOR in a trust, as both my wife and I are in high risk jobs. The main problem is with this (apart from the extra cost) is the CGT.

But apparently we could have a "long term Lease agreement" in place which would allow CGT (and land tax)exemption, should we decide to sell in the future.

I was wondering if anyone is familiar with this or heard of this? If so what does it involve and what are the implications?

Thanks. :confused:
Click to expand...
Like you and your wife, I too have a "high risk" job...so I have a HDT that owns my PPOR. I also have a small 2-bed unit in this HDT. Nearly fell over from shock when the Land Tax bill arrived.

But having nothing to do in the bath one night, I read the small print on the attached flyer. It said that if the property is the PPOR of the beneficiaries and they have no other PPOR, and they pay rent to the HDT, then the rented PPOR is exempt from Land Tax (QLD). I rang them up just to confirm that I hadn't had too much champers. Yep...tis true. All I had to do was download the form from their web site, fill it in, and mail it off with a cc of the HDT docs.

The 2-bed rental unit is NOT exempt. So I figure if I want the trust to buy any more property, I just might use another trust. That way I will minimise my Land Tax bills.

So...good start to 2008...saved myself $2800.:D
 
sailor said:
It said that if the property is the PPOR of the beneficiaries and they have no other PPOR, and they pay rent to the HDT, then the rented PPOR is exempt from Land Tax (QLD). I rang them up just to confirm that I hadn't had too much champers. Yep...tis true. All I had to do was download the form from their web site, fill it in, and mail it off with a cc of the HDT docs.

The 2-bed rental unit is NOT exempt. So I figure if I want the trust to buy any more property, I just might use another trust. That way I will minimise my Land Tax bills.

So...good start to 2008...saved myself $2800.:D
Click to expand...

Hi Sailor

Thanks for sharing. I was dreading the land tax bill which I have yet to receive it. Was very happy to see your post :) !

I was wondering if you could direct me to the website/forms for the exemption? Like to be prepared when the bill arrives. Also we do have our IP in a seperate HDT, so should avoid the land tax there.

Thanks again for sharing. Much appreciated.

Cheers.
 
MiQu said:
Hi Sailor

Thanks for sharing. I was dreading the land tax bill which I have yet to receive it. Was very happy to see your post :) !

I was wondering if you could direct me to the website/forms for the exemption? Like to be prepared when the bill arrives. Also we do have our IP in a seperate HDT, so should avoid the land tax there.

Thanks again for sharing. Much appreciated.

Cheers.
Click to expand...
You are very welcome. Everything you need is here:
http://www.osr.qld.gov.au/forms_publications/land/
 
Hi Gang,

One question I have raised a few times now but have never received any responses to is that if you want to live in a property owned by your Disc Trust then according to some accountants unless you pay rent you will have to pay Fringe Benefits tax. Anyone like to comment on why Fringe Benefits would need to be paid in this situation?

Cheers - Gordon
 
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