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Calling on accountants - is this a dodgy buying method?

Discussion in 'Accounting & Tax' started by Santaslayer, 25th May, 2016.

  1. Santaslayer

    Santaslayer Well-Known Member

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    Hello everyone.

    My colleague is looking to buy a property with potential to build a duplex.
    His accountant told him that he knows a friend selling and the property happens to meet my colleague's criteria.

    Now this is the dodgy bit :

    The potential vendors are holding this place in a trust. The accountant has advised that there is a way to include my colleague in the trust and have all the other parties subsequently "leave it". This then means that my colleague avoids any stamp duty (which is significant in this case) as there has not been a purchase.

    This sounds hella dodgy and I have advised that he get a second opinion.

    Any advice from current accountants?

    Thanks
     
  2. York

    York Finance Broker Business Member

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    Your suspicions are correct. On two counts. The first is that the accountant's 'friend' has a suitable property. The second is that your friend 'gets in' and they 'get out' of the trust.

    Also things to consider -

    1. How will your friend pay for the property?
    2. What happens if the others don't leave the trust?
    3. What happens if the after payment, the trustee removes your friend as a capital beneficiary and keep the money.
    4. Even worse than above point, what happens if after payment he is not added at all as a beneficiary.
    4. How will your friend source the funds to make the purchase and with what acceptable security? (assuming funds will be borrowed).
     
  3. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    Completely dodgy. So many ways for things to turn pearshaped I'd rather pay the duty as I reckon it'll be cheaper than whatever he'll end up with in the trust.
     
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  4. Marg4000

    Marg4000 Well-Known Member

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    I am not an accountant, but one concern would be other undisclosed liabilities that may be included in the trust.
    Marg
     
  5. wogitalia

    wogitalia Well-Known Member

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    At a very quick glance I find it impossible to see how there wont be a change in the beneficial ownership of the property and as such stamp duty payable on the transfer of the property.

    There are a whole bunch of other considerations outside of that but that fact alone should be enough to realise that it's not only dodgy but unlikely to work at all.

    I'd probably be suggesting not only that he gets the hell away from that particular deal but perhaps seeks a more professional and ethical accountant as well.
     
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  6. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    I am not an accountant, but can comment as this is legal advice. It may be possible to do and to avoid stamp duty, but that will entirely depend on how the ownership, both legal and equitable, is structured at the moment and what state the property is in.

    But there are many issues, some taxation and some legal and some finance related.

    Which state is it in and broadly how is it owned now?
     
  7. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    A beneficiary leaving a trust for consideration is also a CGT event.
     
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  8. Greyghost

    Greyghost Well-Known Member

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    I can see what the accountant is trying to achieve and many of the concerns can be alleviated, but something I would avoid..
    Correct.
    Sounds like a unit trust to me. So a disposal of units.
     
  9. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Some states units can be transfer wtihout duty, if the property is under a certain amount. Any CGT event would be the seller's problem.

    Perhaps one way to reduce risk would be to have a new trustee appointed before transferring the units. Old trustee is still able to be indemnified out of the trust assets though if anything from the past were to pop up.
     
  10. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    It is possible in some states to transfer legal title and also the beneficial title and control of the trustee and trust this way and duty may not be payable. However in many instances some numpty makes a mess of it and it does become dutiable. You will need a different form of contract and that could even become a dutiable instrument so take care.

    eg If its in a unit trust transfer of units is dutiable property !! Also in some states the market value of property may trigger another method of assessing duty. Be wary too if its a discretionary or hybrid trust.

    The risk passes with the buyer so its your friends best interest to seek competent advice on the arrangement. Done badly he may not end up with control of the trustee and the trust and it could be a mess. If finacing is involved it could also hit a wall since there is no change in title and the banks own lawyers will scratch their heads and charge a bit to do that. I have been personally involved in a property acquisition in this manner saving $65k in duty. This cost saving was split with the vendor.

    The vendor would normally incur CGT as there is a CGT event that applies in thie case of changing beneficial trust interests. If its a disc trust this aspect can pose a risk to the arrangement as you could end up incurring the CGT risk too. The timing and date of this will be important and extensive deed amendments may be needed.

    You really want a lawyer expert in trusts
     
  11. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    And the legal fees would be potentially more than the duty savings!
     
  12. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    They could. In my example the commercial property legal fees blew out a bit.
     
  13. Santaslayer

    Santaslayer Well-Known Member

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    Terry, not sure what type of trust the current owners are using. My colleague most likely won't know too as he has a knack for getting himself into these sorts of dilemmas without doing much research.
    The property is based in Sydney, NSW.

    At least he knows depreciation is most likely not possible if he owns this joint in a trust.
     
  14. Santaslayer

    Santaslayer Well-Known Member

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    Interesting to know this is possible but sounds like contract needs to be watertight?
     
  15. Ed Barton

    Ed Barton Well-Known Member

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    But travels for business regularly?
     
  16. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    In NSW transfer of units in a unit trust, that owns less than $2mil is charged duty at 0.6%.
    If it is a discretionary trust then changing the beneficiaries could result in a resettlement and full duty being claimed.

    Not sure what you mean about depreciation? Trusts can claim depreciation like people can.