Bare Trust, Minor beneficiary and PPOR CG exemption

Lisa is a 17 year old in year 12.

Homer wants to buy her a property to live in during university.

Property is purchased in a bare trust with Homer as trustee for Lisa. The goal is to transfer the property to Lisa at no stamp duty, so that Lisa can use the property as PPOR.

Can Lisa rent it from Homer at market rents while it is held in bare trust, so that the property is an investment property for Homer? i.e. can the beneficiary rent from the trustee even though beneficiary has beneficial ownership?

If yes, does it affect the stamp duty aspect if the property is eventually transferred to Lisa?

If no, are costs incurred by Homer as trustee considered third element costs to the cost base of the property?


If the property is rented out for a year as a normal rental.
Then Lisa lives in it after that.
Will the property be considered her PPOR from when she lived in it?
Will it be a IP then PPOR situation (CG to be apportioned - in which case the 3rd element costs above apply) because it was rented out the first year?
Is there any significance to the fact that Lisa was a minor while the property was rented out?

 

If Homer is trustee he can't rent it to the sole beneficiary because it is the beneficiary that is taxed. It could be a valid lease at law, but not in equity or for tax.

If Lisa lives in it she can get the main residence CGT exemption on the sale - but for the legislation which says a minor beneficiary cannot claim a main residence exemption at the same time as their parent. so if Lisa claims Homer can't.

But once 18 this no longer applies so the costs during her year living their while a minor could be 3rd element cost base expenses.

 

For the first year, while Lisa is still a minor and if the property is rented out normally and assuming the property makes a tax loss, does Lisa then get a tax loss carried forward?

 

Yes.
How is Lisa getting the money to buy the property though?

 

mortgage taken out or guaranteed by homer. Deposit and repayments possibly from family trust or testamentary trust distributions.

 

No bank would lend where the security for the loan is the property held as trustee.

 

how is it different from a property purchase by a family trust, with the mortgage guaranteed by the trustee? Is it because the trustee of a bare trust has no interest in the property?

 

Its because the legal owner and mortgagor doesn't have an equitable interest. So if they have to take possession they will be taking someone else's property.

The trustee doesn't guarantee a mortgage, but is the borrower and the mortgagor. I think it is different as, although the trustee doesn't have an equitable interest it does have a right to borrow and mortgage trust property, via deed.

 

But how does the equitable interest work if the sole beneficiary is a minor and so cannot take out a mortgage?

 

Not sure what you mean?

 

Can a mortgage to buy a property owned in a bare trust be taken out by by the beneficiary? If so, how would it work if the beneficiary is a minor?

feel like i’m contradicting myself since if the beneficiary could sign a mortgage the bare trust wouldnt be needed and the beneficiary could buy in their own name.

 

No commecial lend is going to contract with a minor or take a mortgage from a minor.

In theory the trustee of a bare trust could borrow with the beneficiary giving a guarantee, but you won't find a lender out there.

The other option is for the trustee to be silent about acting as trustee, but that is possibly a criminal offence.

If the beneficary has the deposit it could be structured so that a resulting trust could be argued later and title transferred without duty or CGT.

 

No. State laws govern a "principal place of residence"(PPOR) which impacts land tax. Care must be taken with use of PPOR as it is often misused. A CGT main residence exemption is different. NSW as an example allows a family one PPOR exemption. A similiar view exists for a main residence.

s118-175 also doesnt assist. Prior to 18 Lisa is a dependant child/minor. When Lisa turns 18 she is likely still dependent on Homer. Homer / family and any dependant cannot each have a different main residence. Age 18 isnt sufficient. The fact Homer is providing accoomdation support for Lisa doesnt assist any arguement she is not dependant. Unlike the spouse rule in s118-170 a dependant exemption cant be shared. The dwelling occupied by Lisa should be adjoining Homers house for any exemption. This would need more than being "next door".

Homer could seek legal advice on apparent purchaser provisions which may allow legal title in Lisa's name but she is a mere apparent purchaser and Homer could transfer title to hmself if Lisa' s relationship with Milhouse fails and he seeks a claim on what seems "her house". Such arrangements can be complicated if a borrowing is required. If Homer has property equity elsewhere it may be easier.

 

have a read of the section!

If, at a particular time, a * dwelling is your main residence and another * dwelling is the main residence of a * child of yours who is under 18 and is dependent on you for economic support, you must choose one of them as the main residence of both of you.

 

Agree !!