Legal Tip 68: Avoid 99%/1% ownership of property

Yes there are. Most in fact - where it is the main residence ending up in 2 names as equial owners.

 

Hi Terry,

Let's assume the following:
- Clients reside in VIC and wish to purchase in VIC
- Husband and wife (let's assume they are happy, and risk is a non issue)
- Paul earns $$$ and, Mary is PT on an income sub $80,000.
- Borrowing Power is a non issue (Mary won't ever borrow on her own)
- Property is in a capital growth zone with minimal yield but (heavily negatively geared).

... We can still use Mary's income for servicing, and she technically sill owns the asset

1. Would it not be wise to put the property ownership as 99/1 in favour of Paul?
2. Paul would enjoy maximum tax benefits - would he not?

I don't understand why this is not a good structure, can you elaborate on the tax / future implications of this. Maybe expand on there being no spousal loan opportunity? Also, as Paul is enjoying maximum benefits, Mary is indirectly benefiting, so does it matter if 1% of costs are attributed to her?

What would your recommendation be?

 

I would recommend Paul and Mary get legal advice on the structure.

Mary owning 1% would stop Paul dealing with the property without her permission.

But the risk is large for the ownership % - she would be exposed to a large debt for little reward. This has consequences in terms of asset protection and further borrowing capacity.

Why no just leave her off?

 

We had a similar issue with ANZ, first in 2006, then in 2009.

 

In 1988, the wife and I bought our current PPOR as joint tenants as we were both salary earners, had NO intensions of going into business and had NO interest in property investing.

Then we formed our first company to start our first business. At that time, we were both directors as you needed two. Later, companies only needed one director so the wife resigned. We changed the PPOR ownership to me 1% : wife 99% as we decided I would be the "risk-taker". By this stage, PPOR was debt free. We went on to start multiple companies for business and I was always the sole director.

We also went on to buy multiple IPs. The first was in 1992 and was me 30% : wife 30% : SMSF 40% (later changed to a trust so we could use it for security). All other IPs were bought in trusts for asset protection except the latest one which is joint tenants as it will become our PPOR some time in the future.

Now we are retired and I am not longer a director any company running a business. No longer a risk taker.

The wife continually reminds me of my 1% share on our PPOR and it is the 1% bit where the creek flows through our 5 acres. I continually remind her that this will change when we sell our current PPOR and downsize into our latest IP. Our other IPs are still in trusts which hurts when the land tax bills come in.

The morale of my story is:

1. Never say NEVER.

2. Due to 1 above, always buy flexibility.

3. Due to 2 above, always get good professional advice (legal, tax, accounting, ...) before doing anything and redo this when the rules change or your situation changes.

4. Never keep a running total of how much you paid for professional advice. It will probably send to an early grave . It is just a cost of doing business.

 

Kierank - did you realise there would be little to no asset protection changing from JT to 1% owner? Especially if there was no consideration given.

 

The short answer is No.

It was all part of a package of advice we got from our lawyer firm years ago who did a full risk analysis exercise across all of our interest in business, property, SMSF, estate planning, ... based on the law at that time.

We were up to our eyeballs with businesses, properties, SMSF, life, ...

This was before the days of Google, SS/PC, ... So we just took their advice and implemented it.

As with most of our risk management strategies, we have never had to rely on them and I am more than OK with that. Too late to implement strategies when the **** hits the fan and you haven't done a thing.

In our case, if the **** had hit the fan and we were given the wrong advice, I assume we would have sued the pants off our lawyers .

If they had implemented the advice they gave us, then it sounds like their assets would have been at risk . If their own asset protection strategies were different to what they gave us, I would guess our case would be even stronger.

 

There is a well know case of Cumins - a barrister who had not paid tax for 20 years was bankrupted by the ATO. But he had transferred his share of his house to his spouse about 20 years prior to his bankruptcy. ATO successfully argued that she was trustee for him. He had paid for the house initially, at least in part of the deposit so there was the resulting trust argument and his income had paid the loan on the house - which was the constructive trust.

Also if the transfer was done without consideration you have the clawback provisions of the bankruptcy act.

If the transfer was done to defeat creditors, even though they may not exist at the time of the transfer, then you have the state legislation to attack it - Property Act in QLD I think or s37A conveyancing act in nsw.

But it would have provided slight asset protection as it would cost a bit of money to attack.

IN summary - smoke and mirrors.

 

Thanks Terry - yes I would agree, leave Mary off.
But Mary doesn't like that idea - haha.

Conversely, around debt recycling...
Paul owns 1% and Mary owns 99% as it's a PPOR, however when they buy a new PPOR and want to keep the property as an investment, they could easily just 'spousal transfer' 100% to Paul, he could take out a loan and vwallah! Tax deductible debt

Correct?

 

Yes, you have to consider things other than tax. Perhaps Mary could end up with an investment property in her own name.

re the spousal transfer - that doesn't work because you are both joint owners so you cannot borrow to pay out their share. I have a private ruling with this view of the ATO somewhere.

 

Actually I don't think my statement above is correct.

I was thinking about a PBR in which the ownership was going from 50%/50% or 99%/1%. Where one ends up as the sole owner they should be able to claim the interest to purchase out the other party (subject to Part IVA not applying etc)

 

Great to know, just like to clarify. I didn't think it was a problem but probably best I contact the ATO.

Thanks for your promptness Terry.

 

You should probably contact a tax lawyer or tax agent rather than the ATO. They can only give general vague answers which are often wrong.

 

There are a few occasions when a 1% or other token property interest is sensible. The 1% may even be held in a trustee capacity.

1. A spendthrift person. The 1% control may assist to limit credit applications and borrowings.
2. A personal with limited faculties or a disability, mental issue of other condition affecting judgement. Same issue. Parents who leave property to handicapped kids need this consideration and another family person with an interest may be wise.
3. An alcoholic, gambler or other addiction. Similar issues

The small interest will mean that a lender is generally obliged for all owners to consent to finance and may limit loss of assets due to fraud and other events.

There are also strategies adult children may wish to consider for older parents especially where their faculties become hazy or they develop friendships that are viewed with scepticism. Elder abuse and elder fraud are very common now and safeguards advised by a legal adviser can be as sound as a estate plan / will. We had a client's mum who "surrendered title" to her new "friends" as a gift in such a case. It took some time and costs to find the broker who financed it and legal advisers had conspired with the "friends" to defraud her and breached independence guidelines in a professional capacity leading to the fraud being committed at far far less then market value (a token sum). The buyers were found in breach on grounds of some trust issues. They had assured her of a home for life which they didnt fulfill.

 

Good point about the elderly issues too, but this also happens to young people.

There is a trend with meeting people online and then sending them large sums of money overseas. Some even sell or mortgage property to do this. It happens to men and woman.
And it even happens to lawyers - there was a case I recall from law school where the lawyer was so in love with a woman that he transferred all of his assets to her - crazy in love - but she didn't have the same feelings for him and he later tried to get it back - and won, because she was in Australia.

 

Today's Bantacs newsletter actually has an article recommending 99%/1% ownership in some situations:
http://www.bantacs.com.au/newsflash/Newsflash_314_16th-November-2016.pdf

Interesting point made:

 

Bantacs may not have explained that the days of salary sacrifice and some super strategies are almost OVER....Coming is a better and simpler system. But also more tax for very high income earners who will pay an extra 15% on all contributions when their combined assessable income + contributions exceed $250K.

The new world of salary sac will mean all taxpayers who sal sac extra contributions with a employer will want to rethink the exercise. Instead all taxpayer will be allowed a personal tax deduction for extra super they personally contribute.

Example time:
Fred is a $150K a year salary earner and presently sal sacs $10K on top of the SGC. So take home pay is $140K. Total contributions are $24,250. His employer contribution gets a EMPLOYER tax deduction at 30% on the $10K. Fred avoids paying tax on the $10K and the contribution is just taxed at 15%.

Under the proposed new world order Fred will no longer sal sacrifice. Instead he will still pay $10K personally. Initially its paid from after tax money but at year end he will claim a deduction of $10K. At his marginal tax rate the value of the deduction is 39%. Fred is $900 (9%) a year better off v's the old way. The employer is no worse off either.

 

Old topic indeed but is this correct?

I can't see how it makes a difference to Fred (other than timing/cashflow).

This taxable income is either $140k or $140k ($150k-10k).

Unless I'm missing something.

 

Hi Terry,

So even though 99/1 ownership or transfer of the family home to the not at risk spouse is a very common asset protection strategy for people in business -you are saying that it won't actually protect you other than costing the opposition a bit more money?

 

It depends. It can help, but the presumption will be the equitable owners are the spouse's 50/50 especially if one spouse paid the loan.

There is a case with a barrister Cummin v ATO where the barrister did something similar and lost.