IP in HDT becomes PPOR....what happens?

[Ralph]

Hope someone can help with a view on this.

We bought a house in 2005 and placed it in an HDT. I took out a loan (640k) to buy units in the trust to fund the purchase and the house has been rented out since purchase with the trust claiming depreciation, operating costs etc., and my claiming interest on borrowing.
We now plan to move back to Australia and live in this house. Originally we'd planned to rent the house from the Trust, but with the furore / uncertainty around HDT's over the last couple of years I'm not sure if that's still valid (any views appreciated!).

So, my question is, in the event it's not possible to rent the house from the HDT and keep claiming costs, interest etc., I'm confused as to what happens when we move in. Does it become a PPOR even though it's in the HDT? and therefore no deductibility? Also, does the cost base reset in the event we sell so as to reduce the CGT - I'd hate to think we'd be liable in the future for the full CGT even though there will have been a long period that we used it as a PPOR. The property has roughly doubled in value and as such having the trust 'sell' it to us wouldn't seem viable.

Appreciate any help.

Cheers

 

[JIT]

Hope someone can help with a view on this.

We bought a house in 2005 and placed it in an HDT. I took out a loan (640k) to buy units in the trust to fund the purchase and the house has been rented out since purchase with the trust claiming depreciation, operating costs etc., and my claiming interest on borrowing.
We now plan to move back to Australia and live in this house. Originally we'd planned to rent the house from the Trust, but with the furore / uncertainty around HDT's over the last couple of years I'm not sure if that's still valid (any views appreciated!).

So, my question is, in the event it's not possible to rent the house from the HDT and keep claiming costs, interest etc., I'm confused as to what happens when we move in. Does it become a PPOR even though it's in the HDT? and therefore no deductibility? Also, does the cost base reset in the event we sell so as to reduce the CGT - I'd hate to think we'd be liable in the future for the full CGT even though there will have been a long period that we used it as a PPOR. The property has roughly doubled in value and as such having the trust 'sell' it to us wouldn't seem viable.

Appreciate any help.

Cheers

Renting from the trust may be possible if you have more than one IP in the trust and stay in it for a short period only eg. 1-2 years, and then move on... but not something I would recommend or know much about with any certainty.

My understanding is that the property will become your PPOR (ie. because you're living in it!) and yes, you will lose all deductibility and again yes (and sorry to break it to you)... there will be no PPOR CGT exemption at all regardless of how long you stay in it! (you will get the standard 50% CGT discount though)

I'm happy to be corrected... but I'd be surprised if I'm wrong on this.

Speak to your accountant, but the HDT is almost a dead entity now (for most people).

You're best bet is probably to hang on to it and keep it as an IP and get a new PPOR.

 

[Ralph]

Thanks JIT, will definitely talk to my accountant. Puts us in a quandry on what to do, don't really want to buy another family size home, looking more for units next - so if we can't make this work then possibility is to sell, but I hate the idea of selling and rebuying another property as we'll incur so many costs.

 

[JIT]

Also, you could buy a new one and move into it for say 2-3 months and then move out after... that way if you live in your HDT property you at least get the 6 yr CGT free PPOR rule that you can use for that new IP you just bought, even though you miss out for the HDT property.

 

[Ralph]

Unwinding HDT - ouch

I have spoken to my accountant now and have been advised the following (might be useful for anyone else in our situation):

Recap: we bought a house within a HDT in 2005, cost around 800k, now worth about 1.7mln.

We're now moving back to Australia and are faced with the prospect that (in my accountants words) "some of the features that were available have been wiped out"(. We want to live in the property but face the prospect that we can only rent it from the trust for 2-3 years - otherwise it's not clear to the ATO that it is a temporary arrangement and deductions obtained from our renting from the trust are retrospectively disallowed in that case. Also, even if we move in and don't make any claims, the property remains a CGT asset - we are allowed to increase the cost base with any non-claimed costs in the future however in the event of a sale.

Our options are:

(1) move in and rent from the trust for a couple of years, then move out and rent it out again. This keeps it as an investment property within the HDT and gives us a couple of years accommodation.

(2) Remove it from the trust by selling it on the market, or selling it to ourselves. The rough cost of this (after tax) is 100k in CGT (taking into account a bunch of things) and 50k stamp duty on purchase 150k just to live in my own house There's pressure on this decision, as the longer we wait (assuming appreciation), the bigger the CGT tax bill and stamp duty on re-purchase and Perth may be in for a bit of a kick due to the latest resource announcements.

(3) Rent or buy somewhere else and leave the property in the HDT as is.

We've been on the move for about 8 years and are sick of renting, so I guess it's option 1 for a couple of years and save as much as possible to buy a new PPOR within a couple of years of moving back to Oz. It's a shame as we did want this as our long-term house, but 150k is such a big hit to make that happen.

The HDT has been a very costly mistake and our accountant isn't recommending people go into them anymore.

 

[DavidMc]

I just bought another IP in a HDT and will live in it, but again I plan to do so for ~2 years and already have other properties in trust. I don't think I'd do it as a long term thing.

It all depends on your HDT wording. You may be able to get it amended.

You should speak with http://www.macquariegs.com.au/, gatherum goss accountants or chan and naylor.

 

[Ralph]

I just bought another IP in a HDT and will live in it, but again I plan to do so for ~2 years and already have other properties in trust. I don't think I'd do it as a long term thing.

It all depends on your HDT wording. You may be able to get it amended.

You should speak with http://www.macquariegs.com.au/, gatherum goss accountants or chan and naylor.

Cheers David, we have an MGS HDT and got in via GGA. Their view is that the HDT still works for negative gearing, but has lost some of the features that were available in 2005 (e.g. redemption of units at cost and conversion to standard disc. trust once you're cashflow positive). Also said they're not recommending getting into them anymore.

 

[jrc]

I have spoken to my accountant now and have been advised the following (might be useful for anyone else in our situation):

Also, even if we move in and don't make any claims, the property remains a CGT asset - we are allowed to increase the cost base with any non-claimed costs in the future however in the event of a sale. It does not seem to me that you would have many non-claimed costs - just rates, insurance, repairs - because with the HDT your major non-claimed cost will be interest which is on your borrowings for units in the HDT, not on the property itself

If you rent from the trust yourselves are you just going to assume you can do it or are you going to apply for a Private Binding Ruling?

 

[jrc]

Just had a look at this month's API and its reference to PBR 90780. Might be somewhat analagous to your situation in realtionto the limit on deductibility of interest only up to the amount of rent received

 

[DavidMc]

Cheers David, we have an MGS HDT and got in via GGA. Their view is that the HDT still works for negative gearing, but has lost some of the features that were available in 2005 (e.g. redemption of units at cost and conversion to standard disc. trust once you're cashflow positive). Also said they're not recommending getting into them anymore.

Thanks for the info.

This prompted me to chat to my advisers.

They have all said that HDTs are still fine.

They have also said a PBR is not required. Even if applied for they'll probably be denied. In a previous application on HDTs the ATO didn't want to say 'yes' but it couldn't say 'no'.

 

[Ralph]

Thanks jrc, David.

Having given it some further thought we have decided on a 4th option which is not to sell the property out of the Trust, avoiding the CGT and Stamp Duty. We'll move in and take a punt that we never sell it in the future and just work hard to pay the loan down to zero like we would if it was our PPOR. Also, without knowing what the government could throw at the market in the future e.g. Stamp Duty on the PPOR? (I make that comment without any insight on that one by the way), we could take a 150k hit now which turns out to have been a waste.

Cheers,

 

[HiEquity]

They have also said a PBR is not required. Even if applied for they'll probably be denied. In a previous application on HDTs the ATO didn't want to say 'yes' but it couldn't say 'no'.

David - I ain't no expert on this topic but this sounds dodgy. Every tax adviser I know says if you're worried just get a PBR. If the ATO won't say yes to a PBR then you know you have a problem. If you're banking on the ATO being wrong based on the advice of someone, then you're in very risky territory IMO.

I personally know an accountant who spend considerable time in jail through providing similar advice. He argued in court that his financial advice was based on legal advice from an eminent and respected QC that the ATO was wrong (on a similar matter actually). The court agreed the QC did provide that legal advice but the fact that the accountant was advising his clients to proceed in the face of the ATO's clear position was enough regardless to send him to jail for a considerable period of time (as it turned out the ATO was right after all this time according to the court).

The eminent QC didn't get prosecuted in that instance even though his (flawed) advice, repeated on a number of occasions, was what started it all. The ATO just went after the accountants (and their clients). It took them many years to get around to it but they got there in the end.

My advice is to not under estimate the risk if you really think you have better advice than the ATO (how likely is that?). 99% of the time the ATO is right - your advisers may or may not get hauled over the coals but that is immaterial to you when a court decides your fate...

Sorry if that sounds dramatic but I have personal experience of this - this accountant is one of the most honest and upright people I know. I reckon they should have gone after the QC instead but under the law everyone involved is culpable and he drew the short straw... the ATO just wanted to set an example to the accountants (and their clients!) that time. Despite his unblemished record and the obvious legal uncertainty surrounding the question at hand, they showed no mercy whatsoever. Forewarned is forearmed!

 

[shuggy]

David - I ain't no expert on this topic but this sounds dodgy. Every tax adviser I know says if you're worried just get a PBR. If the ATO won't say yes to a PBR then you know you have a problem. If you're banking on the ATO being wrong based on the advice of someone, then you're in very risky territory IMO.

I personally know an accountant who spend considerable time in jail through providing similar advice. He argued in court that his financial advice was based on legal advice from an eminent and respected QC that the ATO was wrong (on a similar matter actually). The court agreed the QC did provide that legal advice but the fact that the accountant was advising his clients to proceed in the face of the ATO's clear position was enough regardless to send him to jail for a considerable period of time (as it turned out the ATO was right after all this time according to the court).

The eminent QC didn't get prosecuted in that instance even though his (flawed) advice, repeated on a number of occasions, was what started it all. The ATO just went after the accountants (and their clients). It took them many years to get around to it but they got there in the end.

My advice is to not under estimate the risk if you really think you have better advice than the ATO (how likely is that?). 99% of the time the ATO is right - your advisers may or may not get hauled over the coals but that is immaterial to you when a court decides your fate...

Sorry if that sounds dramatic but I have personal experience of this - this accountant is one of the most honest and upright people I know. I reckon they should have gone after the QC instead but under the law everyone involved is culpable and he drew the short straw... the ATO just wanted to set an example to the accountants (and their clients!) that time. Despite his unblemished record and the obvious legal uncertainty surrounding the question at hand, they showed no mercy whatsoever. Forewarned is forearmed!

thanks for that interesting story.
Is it possible to name this accountant as i'm sure there is a bit of reading material from this case. If you can't name him/her, fair enough and up to you. But this is good advice for DavidMc and something to consider. It is possible that your advisors are 'incorrect' if the ATO was ever challenged in court. I too have recently done away with a HDT and sold assets it contained as the negatives outweighed the benefits. I now buy things in my own personal name.

Sorry to hear about your situation Ralph. I also think the 4th option is the best but you need to keep in mind you are tying up a big chunk of your assets if you are considering to never sell.

 

[Rob G.]

So, my question is, in the event it's not possible to rent the house from the HDT and keep claiming costs, interest etc., I'm confused as to what happens when we move in. Does it become a PPOR even though it's in the HDT? and therefore no deductibility?

TR 2002/18 is sufficient warning for penalties to apply if the ATO proves the correct view.

Also, does the cost base reset in the event we sell so as to reduce the CGT - I'd hate to think we'd be liable in the future for the full CGT even though there will have been a long period that we used it as a PPOR.

No main residence exemption for property held in trust

The property has roughly doubled in value and as such having the trust 'sell' it to us wouldn't seem viable.

Worse, you get CGT when your units are redeemed and yet the Trustee still has the OLD cost base for the property so gets to pay CGT again when the Trustee sells after holding for discretionary beneficiaries. Hopefully there is no resettlement when the property changes to discretionary terms.

Appreciate any help.

Cheers

Of course, you will always find somebody who has similar circumstances who has been doing what you want to do. Perhaps with thier own PBR. But that does not bind the Commissioner to treat you the same.

You are responsible for your tax return.

Cheers,

Rob

 

[HiEquity]

thanks for that interesting story.
Is it possible to name this accountant as i'm sure there is a bit of reading material from this case. If you can't name him/her, fair enough and up to you.

It's all on the public record and in the past and I would like to leave it there. You caused me to look it up again however and the final comments of the judge are telling here, when he stated words to the effect that the honesty of a scheme is not determined in court by a jury of accountants and lawyers but by a jury of ordinary men and women. He pointed out that structuring your tax affairs is not some sort of intellectual game to be played with the ATO. I find that good advice with HDTs... if there is no worthwhile reason other than tax to enter into the arrangement then you're on shaky ground...