HDT quandry, what would you do

[Ralph]

Interested in others views.

We have a property right now in a HDT. We plan to move into it and live in it long-term. By doing so however we will lose all cost deductibility (no longer rented out) yet still accumulate a CGT liability in the event of any future sale.

If we were never to sell it then no CGT, so no big deal, but can't be absolutely sure that's the future. To sell it out of the trust now and make it a PPOR (for future CGT benefit) we will incur about 100k CGT and around 85k stamp duty.

If I knew we would sell in the future the decision would be easier (sell it to ourselves and take the CGT and SD hit now as it will cost more in the future), also if I knew the Government was going to apply CGT to PPOR's anyway in the future, that would also give me a direction. I don't know these answers, but on balance, I think we're best to leave it in the HDT and just treat it as a PPOR with accumulating CGT in the event I ever sold. Assumption being that I'd otherwise spend 185k today on a punt that I'd want to sell or that the government won't change CGT rules in the future anyway.

I know the above is a bit of a waffle, but appreciate any views if you have them!

 

[tom1000000]

I am no expert so do your own research...

I think this is a problem with all trust types.

The ATO says that any property held by the trust for "domestic" purposes is non deductible.

I think that is crap. Provided you pay fair market rent, then it should not make any difference who is providing the income. However, the ATO makes the rules.

Maybe you could rent the property to an imaginary John Smith, who conveniently pays cash?

I guess you would have to make your own official address somewhere else like a relatives house.

As I said my advice is not to be relied upon....

 

[Francesco]

Interested in others views.

We have a property right now in a HDT. We plan to move into it and live in it long-term. By doing so however we will lose all cost deductibility (no longer rented out) yet still accumulate a CGT liability in the event of any future sale.

If we were never to sell it then no CGT, so no big deal, but can't be absolutely sure that's the future. To sell it out of the trust now and make it a PPOR (for future CGT benefit) we will incur about 100k CGT and around 85k stamp duty.

If I knew we would sell in the future the decision would be easier (sell it to ourselves and take the CGT and SD hit now as it will cost more in the future), also if I knew the Government was going to apply CGT to PPOR's anyway in the future, that would also give me a direction. I don't know these answers, but on balance, I think we're best to leave it in the HDT and just treat it as a PPOR with accumulating CGT in the event I ever sold. Assumption being that I'd otherwise spend 185k today on a punt that I'd want to sell or that the government won't change CGT rules in the future anyway.

I know the above is a bit of a waffle, but appreciate any views if you have them!

Firstly, by purchasing the IP in a HDT your HDT owns the property, not you, so you cannot make it your PPOR (for tax purposes) by moving to live in it out of necessity. Legally, the IP stays an IP unless you do not pay market rent and still avail yourself of the tax deductions from the IP. Notice your own observation that your HDT may need to sell the IP to you sometime in the future is when the IP becomes your PPOR, with attendant CGT issues.

I would suggest that it may be appropriate for you to comply with the trust and tax situation of the HDT, ie discharge your trustee obligations by ensuring market rent is collected for the use of the IP and concomitantly avail yourself of the negative gearing that comes from investing in income units on the HDT IP. What is 'living in it long term'? It may be shorter or longer as revealed over time, to be resolved later as needs arises.

As usual, all the attendant disclaimers apply to above general comments from a well-wishing anonymous forumer.

 

[Ralph]

Thanks Tom, Francesco,

Tom, probably won't go that route as I like sunshine, creative suggestion though

Francesco, thanks for the clarity - fully agree with what you said re ownership, I was just a little lazy in my wording!

Re discharging the trustee obligations, my understanding from our accountant (well versed in HDTs) is that we can choose to move in and not receive any rent - our accountant thought it was fine - interested in your thoughts if you believe otherwise.

Also, my understanding from our accountant was that we could only rent from the trust for a few of years, and only if we had a clear intention (provable to the ATO) of moving out in 3-5 years (i.e. must be a temporary arrangement only). If we stayed in after that time (having stopped renting it from the trust) and failed to sufficiently prove to the ATO that something changed in our circumstances to make us not move out, then the ATO would disallow all prior claims over that 3-5 years - ouch.

Long-term for us means no definite plan to sell or move out (the world changes in unexpected ways ofcourse). The property suits our family size, good area etc.

 

[Jonathon]

It's very simple, ask your accountant to apply to the ATO for a ruling on the trust renting the property to you. They recently issued a favourable ruling along those lines, although from memory it was a discretionary trust, not a hybrid.