CGT .How to minimize for pensioners sale of land

B

bianca

Bianca here folks,

thanks for taking the time to read this, coz Im in a bit of a fuddle.
Parents , late 60's, own a block of land. Purchased 9 years ago for 10K, now worth $190K. They have had an offer already for $180K.They are both on old age pension, although father still works occasionally, and their partnership is still operating until next year, when they will fully retire. They are relatively broke, no super, no other assetts, no financial knowledge. Income this year will be around $50K including pension.The block is out in whoop whoop, and there is some guy living on it in their caravan, for nothing. There are also a couple of small sheds on the block, but I doubt if they could pass as being livable.The whoop whoop is in a thriving mining town, but council has decided not to allow subdividing the 5 acre block for 2 years. We have looked at the possibility, but don't want to wait that long.
We also toyed with the idea of pretending that father was living on the block for the PPOR time limit, but it won't work without a dwelling on it, and a caravan is not classed as a dwelling.He actually did live on in for 8 months a few years ago, and spends time there still when he is working in the area.
My parents live in one of my IP's, in the city, for negligent rent, and we still have a loan of $140k on the IP.( valued at $450K)The idea was always for them to live there rent free after the IP is paid of- we pay $120 per week, and have an other 7 years to go.We now thought that it would be best to sell the block, pay of our loan for the IP, and invest the balance in an other IP, to provide for their retirement.( all in our name, so as not to upset their pension) However, CGT is going to eat a huge slice out of the profit, isn't it?
We have toyed with opening a self managed super fund for them, transferring the land into it , letting them retire at the end of the year, and then pulling the money out after July 2007, when the new super rulings come in. But, after having done some more research, it is obvious that you can't do this with a super fund, as we are family, and it would not be an investment as such.
Any advise of how to structure this in the most cost effective way? We calculated a CGT bill of roughly $34k!! which seems unfair to have to pay, when in effect we are subsidising their old age, and not the government.??
Thanks.
 
bianca said:
Any advise of how to structure this in the most cost effective way? We calculated a CGT bill of roughly $34k!! which seems unfair to have to pay, when in effect we are subsidising their old age, and not the government.??
Thanks.
Click to expand...

To legaly minimise CG, freemanfox and navra use agribusiness investments in combination with manage funds and/or LPT investments to pay for them. You may give them a call and check your personal situation with them.

www.freemanfox.com.au and www.navra.com.au

Regards,

James
 
Hi Bianca

Given the time of purchase, you may be able to claim holding costs like council rates; insurance and slashing etc as part of the costs of the property over the last 9 years to further reduce CGT. Have a talk to your accountant about this to get all the facts before making any decisions.

You may also be wise to talk to a financial planner/advisor (even the ones from Centrelink) as it may be possible for your parents to put 1/2 of the profit into Superannuation to reduce their tax bill.

Have fun

Dale
 
Have you considered setting up a company (costs reduced to $400 after 1 July) and utilising the CGT rollover. The gain to date will be "ignored" provided both of your parents are shareholders of the company.

At the very least this would minimise tax at the corporate rate when you sell.

The company could also make super contributions for your parents or pay dividends to a super fund with imputation credits attached after the property has been disposed of.

As Dale says, you will be able to claim holding costs (ignoring the 8 months in residence).

Doug
 
Thanx James, I will check out the site and see if there is any clarity there which may help our situation.

DaleG- thanx for replying. Just a question, if they are allowed to place 1/2 in a super fund, and I guess we will have to set one up for them because they don't have one. So by placing 1/2 in a super fund, that 1/2 will only be taxed at 15%? They would have to withdraw a lump sum directly out of the super fund to contribute to the further payment to payout our IPloan -$40K to $50K? However that part wont work will it, as I understood it, funds drawn from the super fund have to be towards some sort of an investment, to give them an income, and paying out their childs investment loan would not be allowed?

The main thing as the moment is to try to cut our debt to the ip, so they dont have to pay any rent, to do something with the balance, to provide further income for their benefit, and to cut CGT.

Doug, thank you as well. If we set up a company, will it make any difference that the land is in their individual names? So we have to wait until this company has been set up, sell the land,note the holding costs, pay of the Ip with the profit, and pay super contributions with the balance?

How feasable would my plan be, to reinvest the balance in an IP in our name instead, and to sell that later to pay for any retirement home and or medical expenses etc? Are you all telling me that by doing that, there will be no way to cut the CGT liability? Sorry to be such a swonk...Super confuses the heck out of me!!!!
 
Hiya Bianca

Super is not an area that I specialise in and so I may not be the best person to answer this for you....a financial advisor would be able to give you correct answers though.

Your parents could place their super contribution into a fund that is controlled by any of the big institutions. It does not have to be a self managed super fund.

Yes, I believe that the contribution would be taxed at 15%.

The withdrawal from super is likely to be tax free and they can use the funds for whatever purposes they like. It does not have to be for investment purposes at all.

Your parents would still need to pay rent if they lived in your IP. If they do not, then you cannot claim any of the costs you incur as a tax deduction.

Also, if they do pay rent; they may be eligible for rent assistance from Centrelink to give them some more cash each fortnight.

Good luck

Dale

bianca said:
DaleG- thanx for replying. Just a question, if they are allowed to place 1/2 in a super fund, and I guess we will have to set one up for them because they don't have one. So by placing 1/2 in a super fund, that 1/2 will only be taxed at 15%? They would have to withdraw a lump sum directly out of the super fund to contribute to the further payment to payout our IPloan -$40K to $50K? However that part wont work will it, as I understood it, funds drawn from the super fund have to be towards some sort of an investment, to give them an income, and paying out their childs investment loan would not be allowed?

The main thing as the moment is to try to cut our debt to the ip, so they dont have to pay any rent, to do something with the balance, to provide further income for their benefit, and to cut CGT.
profit, and pay super contributions with the balance?

How feasable would my plan be, to reinvest the balance in an IP in our name instead, and to sell that later to pay for any retirement home and or medical expenses etc? Are you all telling me that by doing that, there will be no way to cut the CGT liability? Sorry to be such a swonk...Super confuses the heck out of me!!!!
Click to expand...
 
bianca said:
Doug, thank you as well. If we set up a company, will it make any difference that the land is in their individual names? So we have to wait until this company has been set up, sell the land,note the holding costs, pay of the Ip with the profit, and pay super contributions with the balance?
Click to expand...

You transfer the land into the company - effectively selling it to the company.
Your parents receive only non-redeemable shares in the company as consideration. All capital gains are ignored up to the point of transfer.

When & if the company sells the land it is only assessed on the gain from the time of the transfer to the sale and taxed at 30%.
 
Doug, with your first strategy, why would you recommend that which would give them a tax bill of $54,000 in the company when they sell, plus the costs of implementing the strategy, when they would only pay $34,000 in their own name? The worst case scenario in their own names is 24.25% tax whereas in a company it is at 30%, plus the mess in giving the funds back to them out of the company via a $126,000 franked dividend. With the benefits of having no reduction in making personal contributions next year for amounts over $5,000, wouldn't making the sale in their own name in a lower tax environment without paying for a company or the tax returns that need to be lodged be better? I just want to understand your angle there.
 
Mry said:
Doug, with your first strategy, why would you recommend that which would give them a tax bill of $54,000 in the company when they sell, plus the costs of implementing the strategy, when they would only pay $34,000 in their own name? The worst case scenario in their own names is 24.25% tax whereas in a company it is at 30%, plus the mess in giving the funds back to them out of the company via a $126,000 franked dividend. With the benefits of having no reduction in making personal contributions next year for amounts over $5,000, wouldn't making the sale in their own name in a lower tax environment without paying for a company or the tax returns that need to be lodged be better? I just want to understand your angle there.
Click to expand...

Hi Mry,

The concept of the CGT rollover is that any capital gain can be disregarded when an asset is disposed of to a wholly-owned company. Therefore, provided the requirements for the roll-over are satisfied, the gain of $180k can be completely ignored.

After 1 July it will cost $400 to set-up a company - without any income for the company (it will simply hold the asset - therefore the expenses of the land are capital) a return not neccessary can be lodged (cost $0).

When the land is sold, the company will be assessed on the gain from the date of its acquisition and this will be far less than the gain which would have applied in the individuals hands.

There are then a number of ways in which to get the money out of the company, which can involve dividends, super contributions etc.
 
That is a good idea. The only problem as you mentioned is tying the money up in the company (unless you want to use s 109R each year) and then getting it back via super contributions. I can see some planning opportunities there, but a lot of problems too.
 
Doug,

I think that would be a terrible strategy. Section 122-15 of ITAA 1997 provides that an individual can choose to obtain a roll-over if one of certain specified CGT events occurs. CGT Event A1 Disposal of an asset is captured so they could rollover the land into a company.

For the transferor (i.e. the parents) any capital gain or loss will be disregarded, and the shares that they receive (must be non-redeemable shares in the company) take on the same character as the asset which has been transferred i.e they will be deemed to have acquired $10K worth of shares in New Company Pty Ltd.

The company acquires the asset for the transferor's (i.e. the parents) relevant cost base (for a post CGT asset - which it is because it was only purchased 9 years ago). So the company will record the asset in the balance sheet at the cost base of $10K (being the cost base of the parents)

However consider the implications when the property is sold. The company will sell the property and have a capital gain of approximately $170K ($180K - $10K) and even worse companies do not receive the 50% CGT Discount by virtue of Section 115-10 (which does not list companies as eligible). So the tax will be around $ 54,000.

Individuals do receive the discount so the assessable gain will be $170K x 50% = $ 85,000 and assuming the top marginal rate (45% from 1 July) then maximum tax payable on the gain would be $ 38,250. A difference of approximately $ 16K.

You indicate that the company is deemed to have acquired the asset for the market value. However Section 122-70 and 122-75 states that

Asset acquired on or after 20 September 1985

(2) If you * acquired the asset on or after 20 September 1985:

(a) the first element of the asset’s * cost base (in the hands of the company) is the asset’s cost base when you disposed of it; and

(b) the first element of the asset’s * reduced cost base (in the hands of the company) is the asset’s reduced cost base when you disposed of it.

The individuals will then be seeking to get the funds out of the company so will have to pay a dividend (which will have a franking credit attached to it) but if they are on the top marginal tax rate they will just end up paying extra tax on the amount in excess of the franking credits.

The market value substitution rule covered under Section 112-20 of ITAA 1997 does not deal with those individuals seeking to obtain rollover relief under Section 122. If in fact you did apply MVSR then it would be of no benefit as the landowners would be deemed to received market value and therefore pay CGT on the transfer. The rollover provisions and the MVSR are two separate pieces of legislation and must be read independently of each other. In fact Section 122 makes it very clear that market value is not the appropriate value for the cost base following rollover.

The biggest limitation is that Subdivision 122-A applies only where one taxpayer seeks to roll-over an asset. The essential condition is that an asset owned by a taxpayer be transferred to a company in which the taxpayer is the beneficial owner of all the shares.

if the land is owned 50/50 (which would be fairly common) or even in varying interests to utilise Subdivison 122-A it would be necessary for each taxpayer to transfer his or her interests to a separate company. Two roll-overs would therefore be necessary, one by each of the husband and wife. Following the rollovers, the land would be owned by two companies, one of which would be beneficially owned by the husband and the other by the wife. Subdivision 122-B was inserted to deal with partnerships but Subdivision 122-B would not assist if the asset was merely co-owned by the parties.

The other big issue is that the parents will pay stamp duty on the rollover of the asset from their names into the company.
 
Last edited:
Thanks for the input.

I was looking at the replacement asset roll-overs whereby MVSR apply, specifically s122-60(4).

However I must dispute one part of your comments, and I do so as this is a situation in which I find myself - namely the roll-over as it applies to land jointly owned. As I read it, roll-over relief extends to a partnership transfer of assets to a wholly owned company. The legislative definition of a “tax law” partnership reads as follows:

“…an association of persons (other than a company or a limited partnership) … in receipt of ordinary income or statutory income jointly' (and not carrying on business as partners)”

It is considered that the expanded definition of partnership contained in ITAA 1997 applies for the purposes of roll-over relief, and, in particular, it is considered that the joint owners of income producing property are partners of the “ensuing tax law partnership and the jointly owned income producing property is a CGT asset of that partnership”. Accordingly, roll-over relief is available where land jointly owned is transferred to a single company.
 
Section 122-60(4) refers to the value of the shares issued as part of the rollover. This Section only applies if Section 122-A applies. For partnerships Section 122-B applies and so the correct part of the legislation is Section 122-180. It states that

(1) If a partner * acquired all of the partner’s interests in the assets of the * business on or after 20 September 1985:

(a) the first element of the partner’s * cost base of each * share is the sum of the * market values of the partner’s interests in the * precluded assets and the cost bases of the partner’s interests in the other assets (less any liabilities the company undertakes to discharge in respect of all of those interests) divided by the number of the partner’s shares; and

(b) the first element of the partner’s * reduced cost base of each * share is worked out similarly.

Note 1: There are rules for working out what are the liabilities in respect of interests: see section 122‑145.

Note 2: There are special indexation rules for roll‑overs: see Division 114.

(2) The * market value of an interest in an asset is worked out when the partner * disposed of it. The * cost base or * reduced cost base of an interest is worked out at the same time.


The market value is used to value the non-redeemable preference shares issued. Market value is not used to determine the cost base of the property acquired by the company, that is dealt with in Section 122-200 (if Section 122-B - relating to disposal of partnership interests applies) for dispoals (in this case the co-owners are disposing of the property).

Note that the market value for determining the value of the shares is only used for precluded assets. Precluded assets are defined in Section 122-25 to be :

(3) A precluded asset is:

(a) a * depreciating asset; or

(b) * trading stock; or

(c) an interest in the copyright in a film referred to in section 118‑30.

Land in and of itself is not a depreciating asset and is therefore not a precluded asset and you would not use market value to determine the value of the shares.

The transaction has to be considered in two lights :

1. The value of the non-redeemable preference shares (using Section 122-180 - you do not use Section 120-60(4) as this relates to Section 122-A which is for non partnership rollovers rather section 122-180 specifically relates to partnerships but the effect is the same just a different part of the legislation)
2. The cost base to the company following rollover (using Section 122-70 -non partnerships or Section 122-200 - partnerships)

For Section 122-B to apply, as you say, the issue is the meaning of 'CGT asset of the partnership' in Section 122-125. Note that there is a partnership for tax purposes where persons are in receip of income jointly (under Section 995-1 of the ITAA 1997). There has always been discussion as to whether the asset have to be part of a 'real' partnership or a partnership for tax purposes. Note that Section 122-180 states that "if a partner acquired all of the partner's interests in the assets of the business". This Section does not mention assets not held as part of a business and so the commentators have always questioned where Section 122-B would apply for partnership assets rolled over that do not constitute a business asset. In those cases a private ruling will provide a clear answer.

Even if Section 122-B does apply Section 122-180 says that the cost base for the company acquiring the asset is the cost base of the purchaser (the person disposing of the asset to the company and seeking rollover relief), not the market value. The market value is used to determine the value of the non-redeemable preference shares for precluded assets and cost base for assets that are not precluded.

So the same objections I outlined would still apply with the same tax implications and stamp duty issues.
 
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Thanks for that Coasty. That would have been the first time in the history of Australian tax that a post CGT asset was rolled over with a new cost base without CGT being payable.
 
not good news then?

Hmm, sounds like there is not going to be a way around this problem then?
CGT it is. I think the best option will be to leave the parents totally broke, in the eyes of the government, let then claim as much as possible from Centre link in the form of pensions, rent assistance, and what ever else I can think of, because there obviously is no point in trying to keep your family out of the welfare system. Sounds like the only legal way to get the CGT back, without causing too many headaches. I guess we have all paid for the majority of Centrelink recipients through our taxes for all our lives anyway. May as well get it back somehow. These laws certainly dont want to make you keep on trying to do the right thing.Sorry for the pessimistic mode folks.

But it sometimes gets realy realy frustrating when you realize that the way to wealth and financial independence is realy not just about how hard you work, or how honest you are, but more about how much you know about twisting rules, how much you can afford to pay for advise, and who you know at the time.:( They should have had forums like this 10 years ago!
cheers all
 
bianca said:
Hmm, sounds like there is not going to be a way around this problem then?
CGT it is. I think the best option will be to leave the parents totally broke, in the eyes of the government, let then claim as much as possible from Centre link in the form of pensions, rent assistance, and what ever else I can think of, because there obviously is no point in trying to keep your family out of the welfare system. Sounds like the only legal way to get the CGT back, without causing too many headaches. I guess we have all paid for the majority of Centrelink recipients through our taxes for all our lives anyway. May as well get it back somehow. These laws certainly dont want to make you keep on trying to do the right thing.Sorry for the pessimistic mode folks.

But it sometimes gets realy realy frustrating when you realize that the way to wealth and financial independence is realy not just about how hard you work, or how honest you are, but more about how much you know about twisting rules, how much you can afford to pay for advise, and who you know at the time.:( They should have had forums like this 10 years ago!
cheers all
Click to expand...

Hi Bianca

Congratulations on your waterfront property from the other thread.

But in this thread...is it such a bad problem to have? After tax, they will have made 150k or so...and depends on what other deductions may yet be available. They may be able to put this into super, or create some sort of complying income stream that has little impact on their potential pension amounts. The partnership of which you speak...is the land tied in with that at all? There are generous retirement provisions for sales of long term businesses due to retirement...could they take advantage on those? Could you sell them the house they live in? It may mean you will incur CGT, but if you get it back from the estate, it may give you a big period of capital growth exempt from tax?

I get frustrated when I think of all the people that could be saving for themselves pissing the money up against the wall (in one form or another) and then expecting to pull a pension at the end. Given life spans now it is not unreasonable that a person "retired" life may be as long as their "working" life. Many people would never have paid enough tax to even account for all the pension money they will receive, let alone any other services (such as health) they may utilise...
 
Bianca, the simplest solution for your parents would be to sell the property, get the gain, make a superannuation contribution to a super fund in order to claim a deduction to offset the capital gain and then retire and get the money paid back out. I would recommend seeing a professional about this as there are some requirements that need to be fulfilled for this strategy to work.
 
Check with Centrelink

Hi Bianca,

Please check with centrelink before your parents 'gift' you money to pay out your IP loan. If they 'gift' too much in one year they will not be eligable for 100% of the pension. I can't remember the amounts but phoning the 13 centrelink number will straighten it out for you. Sorry to throw another spanner in the works :(
fish
 
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