Land tax and granting life interest

Hi,
I was doing some reading the other day about a article written by Ed Chan and would like some people thoughts about the below scenario, of the chance to avoid paying Land Tax in NSW, relating to property in a family trust. Basically by granting a life interest on the property (with conditions, so you don’t lose the asset protection) you can legally avoid paying it.... any thoughts

Quote:-
Mr and Mrs Smith are medical specialists and in highly litigious industries where they can both get sued, so they naturally did not want any assets in their own name and they were in the market for a new home.
They had visited one of the top 3 largest Accountancy Firms in the city who advised them that they should purchase their home in a Family Trust. As the property was held in a Trust it would be protected from litigation because the home was not in their name. While this is correct, it won’t safeguard the property from a divorce settlement. The only protection from a divorce settlement is getting a prenuptial agreement before getting married.
A year later Mr and Mrs Smith receive a land tax bill of $46,000 for this home. This will be an annual land tax bill for the rest of the time they owned that property.
If you own your own home and wonder why you have not received a land tax bill from the Office of State Revenue, it’s because under normal circumstances there is no land tax liability when the property is your home. However when a Trust owns it (this was a NSW case) it’s deemed an investment property subject to land tax.
In addition, Trusts in NSW do not get a land tax threshold so land tax is paid from the very first dollar.
They then visited 3 other large Law Firms in the city in an attempt to get a solution. They all came up with various “band aid” solutions to try and get them out of this problem. The solutions they provided went from converting the Family Trust to a Fixed Trust to qualify for the land tax threshold in NSW, thus reducing the land tax only by $6,000, to other elaborate schemes which cost them tens of thousands of dollars in legal costs but still did not eradicate the land tax bill completely.
They were contemplating selling the property when they were referred to us. They were understandably extremely sceptical when they came in for their meeting, already having accepted that there was nothing more they could do since they had been to the large end of town and paid over $50,000 in accounting and solicitor fees.
Our fee was $395 for a couple of hour’s consultation. They came to us from a referral who had told them that if they wanted property advice there was no one better, so reluctantly they came in.
We immediately advised them we could eliminate the land tax bill completely by the granting of a Life Interest back to them.
There was absolute silence and disbelief because “they had been to see so many others (quote) and no one could come up with an easy and cost effective solution.”
“Are you sure this is legal?” they asked.
In NSW one can grant a Life Interest to a third party and what they use the premises for will determine the tax liability. As it was used as their home, they could apply to be exempt from land tax. Naturally a life interest is an asset, so from an asset protection point of view we had to build into the agreement the granting that the life interest ceases to exist if they were sued.
Life interests are very common. The most common way that Life Interests are used is when someone wants their home to go to their 3 children but they may want their disabled child to live out their life in the house. So to protect this child from being thrown out by the other children a Life Interest is granted to the disabled child allowing her to stay until she passes.
There is no stamp duty in the granting of a life interest in NSW but there are different rules for different States. For example in Queensland stamp duty is payable. One must get individual advice before acting on this because everyone’s circumstances are different and there are different laws in the different States.
 
Hi snizen99

Ed mentions, "Trusts in NSW do not get a land tax threshold so land tax is paid from the very first dollar." This is a challenge specfic to "discreationary" trusts. To get around this lack of a land tax threshold, we own the asset in a unit trust and have a discreationary trust own the units.

Selling the property via an Instalment Contract also allows you to submit a Land Tax variation that moves the Land Tax liability to the new purchaser. The Stamp Duty implications of doing this vary from State to State but, if you are creative, they can be overcome.

Cheers, Paul
 
Hi Paul,

Thanks for responding, that’s very interesting, what state are you in mate? I’m in NSW.

I would have thought the NSW OSR would deem the “fixed unit trust” which has a “discretionary trust” as the unit holder , as a “special trust” and you would still have to pay land tax from the first dollar, as the owner is a discretionary trust.

I going to give the NSW OSR a call on Monday and ask, will fill you in when ive talked to them.

Regards

Stacey
 
Hi Stacey

Yep, I'm in NSW too. OSR Land Tax assessments look at the owner of the the property on the 31 December each year, not who or what controls the owner.

For example, if a property is owned by a company, it makes no difference to the OSR what entity owns the shares. The same applies to a unit trust. It is not a discreationary trust and what entity owns the units is not taken into account.

I'm not an accountant but that's the advice my accountant gave me.

Cheers, Paul
 
Hi Paul,

Does your unit trust have a corporate trustee? And what name:- company, individual or unit trust, does it have on the lands title office?

Did you have any problems with the bank and finance (if you had any) with that kind of structure?

Thanks in advance for the help.

Regards

Stacey
 
Hi Stacey

Yes we use a corporate trustee. Usually the name on the title will be ABC Pty Ltd atf ?????? Unit Trust.

With the word "Unit" in there the OSR usually leaves us alone. If not we just put in a Land Tax Variation Form showing the trust is not discreationary.

Lenders vary but we can usually get a loan if just about every man and his dog provides a persoanl guarantee ;-)

Cheers, Paul
 
Thanks Paul, thats very goods news, very easy way to save a fortune in Landtax.

Again thanks for your input.

Regards

Stacey
 
Hi,
I was doing some reading the other day about a article written by Ed Chan and would like some people thoughts about the below scenario, of the chance to avoid paying Land Tax in NSW, relating to property in a family trust. Basically by granting a life interest on the property (with conditions, so you don’t lose the asset protection) you can legally avoid paying it.... any thoughts

Quote:-
Mr and Mrs Smith are medical specialists and in highly litigious industries where they can both get sued, so they naturally did not want any assets in their own name and they were in the market for a new home.
They had visited one of the top 3 largest Accountancy Firms in the city who advised them that they should purchase their home in a Family Trust. As the property was held in a Trust it would be protected from litigation because the home was not in their name. While this is correct, it won’t safeguard the property from a divorce settlement. The only protection from a divorce settlement is getting a prenuptial agreement before getting married.
A year later Mr and Mrs Smith receive a land tax bill of $46,000 for this home. This will be an annual land tax bill for the rest of the time they owned that property.
If you own your own home and wonder why you have not received a land tax bill from the Office of State Revenue, it’s because under normal circumstances there is no land tax liability when the property is your home. However when a Trust owns it (this was a NSW case) it’s deemed an investment property subject to land tax.
In addition, Trusts in NSW do not get a land tax threshold so land tax is paid from the very first dollar.
They then visited 3 other large Law Firms in the city in an attempt to get a solution. They all came up with various “band aid” solutions to try and get them out of this problem. The solutions they provided went from converting the Family Trust to a Fixed Trust to qualify for the land tax threshold in NSW, thus reducing the land tax only by $6,000, to other elaborate schemes which cost them tens of thousands of dollars in legal costs but still did not eradicate the land tax bill completely.
They were contemplating selling the property when they were referred to us. They were understandably extremely sceptical when they came in for their meeting, already having accepted that there was nothing more they could do since they had been to the large end of town and paid over $50,000 in accounting and solicitor fees.
Our fee was $395 for a couple of hour’s consultation. They came to us from a referral who had told them that if they wanted property advice there was no one better, so reluctantly they came in.
We immediately advised them we could eliminate the land tax bill completely by the granting of a Life Interest back to them.
There was absolute silence and disbelief because “they had been to see so many others (quote) and no one could come up with an easy and cost effective solution.”
“Are you sure this is legal?” they asked.
In NSW one can grant a Life Interest to a third party and what they use the premises for will determine the tax liability. As it was used as their home, they could apply to be exempt from land tax. Naturally a life interest is an asset, so from an asset protection point of view we had to build into the agreement the granting that the life interest ceases to exist if they were sued.
Life interests are very common. The most common way that Life Interests are used is when someone wants their home to go to their 3 children but they may want their disabled child to live out their life in the house. So to protect this child from being thrown out by the other children a Life Interest is granted to the disabled child allowing her to stay until she passes.
There is no stamp duty in the granting of a life interest in NSW but there are different rules for different States. For example in Queensland stamp duty is payable. One must get individual advice before acting on this because everyone’s circumstances are different and there are different laws in the different States.

Very clever.

The granting of a life estate would be a CGT event however. The cost base for the CG would be based on the market value. The value would probably be less than the value of the property as it will revert back to the owner on their death. There may also be CGT issues when the life tenants die and it reverts back.

TR 2006/14 Income tax: capital gains tax: consequences of creating life and remainder interests in property and of later events affecting those interests
http://law.ato.gov.au/pdf/pbr/tr2006-014.pdf
see 85 onwards and example 6.

So this may be a way around land tax, but it creates new problems with CGT. This may still work out the cheaper option however. I am not sure how you would value a life estate.
 
I guess valuing a life estate would depend on the age of the person acquiring an estate with someone older having, on average, less time left meaning it would revert quicker.

But say on a property worth $500,000 that the life estate was worth $200,000 I think that would be a $200,000 capital gain to the person gifting the estate. I don't think there would be any 50% discount available, so there could be substantial tax payable. Having the trust grant the life estate would mean the CG would be in the trust and able to be distributed tax effectively, but it would still be a substantial amount compared to the paying of the land tax and would take many years to recoup. Also future tax flexibility of the trust would be lost while the life estate exists.

I am no tax expert though. Can anyone confirm this is how it would work?
 
Interesting article, but doesn't say much on tax other than:

The potential negative capital gains tax consequences of life interests should not be overlooked. Typically, the general tax position is that the estate will be entitled to the main residence exemption if the property was the deceased’s home and the property is sold and settlement of the sale of the property takes place within 2 years from the date of the deceased’s death. However, a life tenancy significantly complicates this position and the position becomes even more complicated if the life tenant decides during his or her lifetime to surrender his or her interest in the property and the life tenant and the remaindermen decide it would be best to sell the property. In both cases, significant capital gains tax consequences may flow from a disposal of the property.
 
Top