An Example of How poor Ownership Structuring Can be Painful.

An Example of How poor Ownership Structuring Can be Painful.


Homer and Marg own 5 investment properties all jointly as Joint Tenants. All in NSW and with a combined land value of $1,200,000.

Homer is on the top marginal tax rate and Marge doesn’t work.

They have reached their borrowing capacity.

They have just paid off their main residence and are saving about $10,000 per month.


Issues

1. Land tax
Combined land tax is $9,236
If they have owned $600,000 worth of land each then there would be no land tax


2. CGT
If they sell any investment property 50% of the gain will go to Homer. They can’t divert the income to Marge.


3. Paying Down Debt
They have excess cash, ideally this would applied to Marge’s debt as she would pay less tax. But as all the loans are joint they are stuck with reducing the debt relating to both Homer and Marge


4. Offset Accounts
Similar with the cash savings/buffer. It must go into an offset account liked to a joint loan so Homer’s income will increase.


5. Estate Planning on Death
Because they own everything as joint tenants if one dies there is no opportunity to get half of the assets into a testamentary discretionary trust. This will result in extra tax being payable after the death of one of them.


Possible Solutions?

As they have reached their borrowing cap there may not be much they can do if they cannot qualify for a loan. But they could consider

a) Spouse A selling 50% of the property to Spouse B.

b) Selling on property and buying a replacement in Marge’s name only

c) Save up and lend cash to a trustee of a discretionary trust which will buy property and then divert the rental income to Marge

d) Sever the Joint Tenancy so they hold the existing properties as Tenants in Common in equal shares – no duty, no CGT and easy to do without triggering a loan reassessment. They could then each leave their shares of the properties to the trustee of a testamentary discretionary trust controlled by the other spouse. Half the rents could then be streamed to the children potentially tax free.

e) etc

 

I dont think this is an issue In QLD "An individual (a person who usually resides in Australia) is liable for land tax if the total taxable value of their land, comprising land owned solely and their share in land owned jointly with others, is $600,000 or more

Or have i misunderstood?

 

No, in QLD joint owners are assessed separately on their share of the property.

 

If Homer passes a way and Marge decides to hold on to all the properties (assuming she can service it all), what taxes are immediately payable and what changes are there ongoing?
Is CGT deferred or payable on transfer?
Land tax from joint tenant to sole ownership is still the same figure, just now all charged to Marge?

If this were tenants in common and the 50% went to the testamentary trust, the income would be taxed differently ( like you said in the example to children) but could the executor of the discretionary will decide that the income be distributed to Marge and not divide it up to the other beneficiaries (kids)? So the income Marge receives will practically be the same as Joint Tenancy? Is that possible or have I interpreted discretionary testamentary differently?

 

I have a VIC property which I was the purchaser but then my spouse was also a nominee. I wasn't familiar with this approach (with my signing ahead and then adding the spouse later on). The Transfer of Land has both of us but as Joint Proprietors. If I wanted to do this via the Duties Online, I found that this could be done by myself. Will this cause an issue with the lender or anyone else?

 

There are no taxes or duties payable on the transfer of title from homer and marge to marge on death.
Once Marge becomes sole owner she is tax on all income and land tax.

If the share of the property owned by homer is passed to a trustee of a TDT then the income can be distributed to a wide range of potential beneficiaries. If the trustee distributes to Marge she would pay the same tax as if she inherited. Marge would likely be the appointor and trustee of any such trust so she would unlikely distribute income to herself.

 

If there is a mortgage over the property any change in legal ownership would need to be approved by the mortgagee, but if going from JT to TIC in equal shares they readily grant this permission.

 

Thanks. I went through the application process but didn't hit the Submit button just in case an approval was required. Does this usually cost money for a change? Specifically for VIC? I didn't see any charges before the submission at the time.

I guess I was asking in regards to extraordinary circumstances, Marge has the ability to distribute everything to herself if she chooses to, which would be the same as her joint tenant situation if Homer dies?
So with TIC, she has more flexibility to distribute the funds to her children and they would benefit from a higher tax threshold?

I have friends who are in a similar situation with adult children, multiple NSW properties setup as JT so the land tax has started to hit them. Should their partner pass away, it sounds like TIC will relieve part or all of the land tax issue. I believe they want to keep the IP for the kids when they both pass away but they just have a simple will. I'm sure you have a Tip/Strategy somewhere which fits this criteria but thanks for this post. I believe the surviving spouse will still want to keep the income and then pass everything to the children until their last breath. Could be other issues to deal with if there's no TDT

 

Yes it costs money to change as there are land titles office fees and bank fees.

Your friends should get legal advice on the consequences of changing to JT, and so should you, and the land tax consequences of a trustee inheriting half of several properties.