Ideas to reduce land tax in Queensland?

[wylie]

We have properties in a trust and paying a lot of land tax. We have a few options.

Scenario 1. My brother and I each move a property from the trust into our individual names to spread the land tax. Neither he nor I hold property so this would be the only IP for each of us, so land tax would be low (and lower than if we set up a trust, which has a lower threshold than if we hold in our own names).

This would entail paying stamp duty on current value which is more than the land tax on each property, so this would only work if we plan on holding long term. I understand we cannot move a house from the trust into a SMSF due to not being arms length.

Scenario 2. Sell a property or two from the trust, in two different financial years to minimise the capital gains tax. My brother and I each take half the sale proceeds and use the funds to buy another property, or reduce our private debts, or buy a speedboat . I would want to use my funds to buy either another house or shares and hold them in a SMSF.

My understanding is that whilst we pay selling costs on the sale of the house from the trust, and stamp duty for the new property in the SMSF, it means that SMSF property has great tax benefits going forward. Is it right that if we do this, the rent from that property becomes tax free? If so, is it only after we are a certain age? And is it right that if that SMSF property is eventually sold, it is capital gains tax free? After a certain age?

We could use proceeds (my half) to help build the planned townhouses on our double block, but I think I'd prefer to put it into more property to have a larger asset base (even though we would have a humongous loan) that can be sold down the track to reduce debt.

I'm open to hearing other suggestions. I don't know what I don't know

 

[Paul@PFI]

The QLD Duties Act is the biggest issue. Change of ownership in QLD is dutiable. Even in a trust. An indirect trust interest change is taxable in QLD unlike other states.
https://www.osr.qld.gov.au/duties/transfer-duty/trusts.shtml

QLD has very generous land tax rules and very punitive duties under its Duties Act. It has a horrid indirect Duties rule if you seek to take advantage of making a mistake in ownership and later changing interests. Mean while you can have multiple trusts. Just dont taint them.

We have had this discussion before. The Duties Act hasnt changed.

 

[Paul@PFI]

We have properties in a trust and paying a lot of land tax. We have a few options.

Scenario 1. My brother and I each move a property from the trust into our individual names to spread the land tax. Neither he nor I hold property so this would be the only IP for each of us, so land tax would be low (and lower than if we set up a trust, which has a lower threshold than if we hold in our own names).

This would entail paying stamp duty on current value which is more than the land tax on each property, so this would only work if we plan on holding long term. I understand we cannot move a house from the trust into a SMSF due to not being arms length.

Scenario 2. Sell a property or two from the trust, in two different financial years to minimise the capital gains tax. My brother and I each take half the sale proceeds and use the funds to buy another property, or reduce our private debts, or buy a speedboat . I would want to use my funds to buy either another house or shares and hold them in a SMSF.

My understanding is that whilst we pay selling costs on the sale of the house from the trust, and stamp duty for the new property in the SMSF, it means that SMSF property has great tax benefits going forward. Is it right that if we do this, the rent from that property becomes tax free? If so, is it only after we are a certain age? And is it right that if that SMSF property is eventually sold, it is capital gains tax free? After a certain age?

We could use proceeds (my half) to help build the planned townhouses on our double block, but I think I'd prefer to put it into more property to have a larger asset base (even though we would have a humongous loan) that can be sold down the track to reduce debt.

I'm open to hearing other suggestions. I don't know what I don't know

s66 SISA prohibits the SMSF acquisition. So the tax consequences are irrelevant for a SMSF. A SMSF cant acquire with a loan under s67A/B if s66 prohibits it. Cant be acquired with a loan either. Arms length is not a issue. Even arms length is prohibited.

Your acquisition from the deceased estate is prohibited.

 

[wylie]

We have properties in a trust and paying a lot of land tax. We have a few options.

Scenario 1. My brother and I each move a property from the trust into our individual names to spread the land tax. Neither he nor I hold property so this would be the only IP for each of us, so land tax would be low (and lower than if we set up a trust, which has a lower threshold than if we hold in our own names).

This would entail paying stamp duty on current value which is more than the land tax on each property, so this would only work if we plan on holding long term. I understand we cannot move a house from the trust into a SMSF due to not being arms length.

Scenario 2. Sell a property or two from the trust, in two different financial years to minimise the capital gains tax. My brother and I each take half the sale proceeds and use the funds to buy another property, or reduce our private debts, or buy a speedboat . I would want to use my funds to buy either another house or shares and hold them in a SMSF.

My understanding is that whilst we pay selling costs on the sale of the house from the trust, and stamp duty for the new property in the SMSF, it means that SMSF property has great tax benefits going forward. Is it right that if we do this, the rent from that property becomes tax free? If so, is it only after we are a certain age? And is it right that if that SMSF property is eventually sold, it is capital gains tax free? After a certain age?

We could use proceeds (my half) to help build the planned townhouses on our double block, but I think I'd prefer to put it into more property to have a larger asset base (even though we would have a humongous loan) that can be sold down the track to reduce debt.

I'm open to hearing other suggestions. I don't know what I don't know

s66 SISA prohibits the SMSF acquisition. So the tax consequences are irrelevant for a SMSF. A SMSF cant acquire with a loan under s67A/B if s66 prohibits it. Cant be acquired with a loan either. Arms length is not a issue. Even arms length is prohibited.

Your acquisition from the deceased estate is prohibited.

I haven't mentioned an acquisition from a deceased estate? I may be confusing things as I think you may recall my question, about this time last year, whether I could buy my parents' house and hold it in a SMSF, and understand from the answers I received, that I could buy it in my own name but NOT buy it in the name of a SMSF, as it was not arms length. My understanding at the time was that I could buy a house and hold it in a SMSF but not a house from my father's estate or any living family member (is that right)?

So could I use cash from sale of a trust IP and buy an IP and hold it in the name if a SMSF? If so, what are the benefits in a SMSF over holding in a trust or in my name (no other IPs in my name)?

I was under the impression that buying in a SMSF can give us tax benefits but I don't really understand if these tax benefits (income tax and CGT?) can save us money now, or in the future when we retire?

I have a vague memory from several years ago about reading on here someone saying buying an IP in a SMSF would mean no income tax from rent (after retirement?) and from capital gains tax on sale? At the time, I couldn't buy in a SMSF so didn't take too much notice.

So your answer (Paul) gives rise to these questions (assuming we sell a trust house and split the proceeds between ourselves and then use cash to buy a house with no previous link to us, the trust or family member).

1. What benefits does holding a property in a SMSF give?

2. If we can buy an IP in a SMSF what happens to the rent and how do we pay rates etc (from the rent?) Can we use the rent as income or is it held in the SMSF until we retire?

3. If we can buy an IP in a SMSF what happens when we retire? Or when we die?

4. Do we pay income tax on the rent income or save CGT on sale if we sell after we stop working?

If we decide to stop paying so much land tax by selling one or two houses and pay the costs involved in selling, I want to ensure that if we purchase anything with the sale proceeds, that we minimise tax now and on eventual sale (or if we die - minimise tax for our children).

If it seems there is no benefit in buying another property in the name of a SMSF, I could buy in my own name (no other IPs in my name currently) or set up a trust.

Sorry for all the questions. Mistakes were made by my parents, even with professional advice at the time, and if we do make changes, I want to try to get it right this time. (The advice was mainly to protect assets from a rogue son. Land tax at the time was not the problem it is now with land values going through the roof. It may have been discussed, and certainly setting up more than one trust was recommended, more from the point of view of making it easier for my other brother and I managing our own half going forward.)

We would seek professional advice but I would like to have some idea of my options.

 

[Terry_w]

So could I use cash from sale of a trust IP and buy an IP and hold it in the name if a SMSF?

No you couldn't directly do this. Capital of the trust is not your money but belongs to the beneficiaries of the trust. The trustee may be able to distribute capital to one or more beneficiaries but you need to review the deed to make sure this is permissible. The SMSF will be a trust as well. The trustee of a SMSF cannot buy property with someone else's money. You would have to get money into the SMSF for it to be able to buy property. This could be from a rollover of existing funds, new contributions or a related party loan.

Once funds are contributed to a superfund they are unable to be take out until you meet a condition of release. This doesn't mean retirement only but could be death, a permanent incapacity, reaching a certain age - 55 to 60 depending on when you were born.

A SMSF is taxed on its income - CGT and rent etc. max 15% income tax or 10% CGT if asset held longer than 12 months. Once a pension (income stream) is paid to a member any income and CGT can be 0%. Any income paid to a member may be tax free or may be taxable less a rebate, depends on age and amounts.

As one approaches 55/60 it becomes more beneficial to set up a SMSF as there are various strategies to reduce tax that are available. e.g. salary sacrifice $30k into super and this reduces your taxable income - potentially by 45%. The $30k is taxed at 15% going into the super. Its earnings are then taxed at 15% and possibly 0%. A pension could then be drawn out which could be potentially untaxed.

ie. put $30k in, take $30k out so you have the same income but save a lot in tax. You could adjust the figures so you might only take say $20k out and still have the same after tax income.

 

[wylie]

Thanks Terry. To clarify some of the points you raised, here is some more info.

The trustee is able to distribute capital, and we have done so already. My brother has a very good grasp of the trust, I don't understand it, no matter how many times he has tried to explain it .

This trust was set up to keep assets from the rogue brother. You know how that story ended . It did protect things to a degree, and without the trust, he could have got even more, but Mum always said "once it has done its job, you may wish to dissolve it, or keep it going". She was advised to set up two trusts, but with several houses going in, this was a problem with different houses possibly being worth considerably more or less than others chosen at the time.

Now, with the dropkick sibling sorted out, there is the option winding up the trust, taking our half each and doing our own thing.

Whether we dissolve it, or sell one or two houses and distribute the capital to ourselves (or the other beneficiaries - our children and spouses), this is the money I would think I could buy another house with but structured better, to save continuing every year to pay the huge land tax we currently pay.

The costs of selling one or two houses is high, but is an expense to be borne no matter when we sell. Cost to buy another house is high, so if I did that with my half, I would want to ensure I structure things the best way going forward.

I am 55 next year, so my understanding is that I could "retire" next year (I'm a casual in retail by choice - could resign any time to facilitate this), take my super and pay some tax, but if I wait until 60 I can get hold of my super tax-free? Is that right?

If I became the trustee of a SMSF using cash legally distributed to me from the trust, whether it is closed down or not, could I use that cash to buy a house or shares and hold them in a SMSF?

If not, could I use that cash to build our townhouses?

Hubby and I together have enough super to buy a house if we wish to go down that path. Hubby is 55 now and not working.

If we buy a rental house in our super, are you saying the rent would be taxed at 15% after we have held it for twelve months, and after we turn 60 we would get the rent tax free? And if we sold a house purchased in the SMSF, and held for more than 12 months when we are both aged over 60 it would be CGT free?

 

[Terry_w]

If I became the trustee of a SMSF using cash legally distributed to me from the trust, whether it is closed down or not, could I use that cash to buy a house or shares and hold them in a SMSF?

If not, could I use that cash to build our townhouses?

Hubby and I together have enough super to buy a house if we wish to go down that path. Hubby is 55 now and not working.

If we buy a rental house in our super, are you saying the rent would be taxed at 15% after we have held it for twelve months, and after we turn 60 we would get the rent tax free? And if we sold a house purchased in the SMSF, and held for more than 12 months when we are both aged over 60 it would be CGT free?

you shouldn't be trustee, but have a company set up for this. You cannot use your cash to cause the superfund to buy property, but you could contribute your cash to the Superfund, somehow, which could then buy a property or shares.

you should consider having the SMSF borrow to buy property as property without leverage does not give much of a return.

If your SMSF buys property any rent will be taxed at 15% and CG at 15% or 10% after 12months. After a pension is set up the SMSF may not pay any tax and a member may be able to get an income streat tax free.

 

[wylie]

A SMSF cant acquire with a loan under s67A/B if s66 prohibits it. Cant be acquired with a loan either. Arms length is not a issue. Even arms length is prohibited.

you shouldn't be trustee, but have a company set up for this. You cannot use your cash to cause the superfund to buy property, but you could contribute your cash to the Superfund, somehow, which could then buy a property or shares.

you should consider having the SMSF borrow to buy property as property without leverage does not give much of a return.

If your SMSF buys property any rent will be taxed at 15% and CG at 15% or 10% after 12months. After a pension is set up the SMSF may not pay any tax and a member may be able to get an income streat tax free.

Thanks Terry. I'm not sure if I can borrow or not. You both know what you are talking about, and I'm guessing Paul's answer may have been in response to my question confusing him (or me wording it badly?)

What sort of person do I see professionally to ask all these questions... accountant, lawyer, financial planner?

My head hurts .

 

[Terry_w]

Yes you can't sell a property you own to a SMSF of which you are a member unless the property is business real property. but a SMSF can borrow to buy a property in general.

Who you see will depend on what advice you are after. A SMSF acquiring property would be legal advice and possibly financial advice = lawyer and financial planner.

 

[wylie]

Thanks Terry. We have a few things to sort through, but my brother and I have both discussed how we should deal with the ever increasing land tax.

We would probably have done something earlier if circumstances were different, but you have an idea of what we have been dealing with for several years. Now that drama is finalised, and we need to look ahead and work out where we want to steer our finances. We need to discuss this more. He has his own reasons for wanting to continue the trust (which you know about) but I'm feeling increasingly hog-tied by being unable to do my own thing.

There is plenty of discussion required, and decisions to be made about which direction we will take before we take proper advice...

I really appreciate your help.

 

[Terry_w]

You might want to look at splitting the trust into 2 and dividing up the properties and then each taking control of 1 trust. There may be stamp duty concessions and CGT concessions.