Q: Moving Primary Residence into a Trust

If one family member moves their primary residence into a trust for 3 beneficiaries (and that family member becomes a trustee and 1 of the 3 beneficiaries), what are the tax implications.

There seems to be conflicting advice.

1. Some say that the transfer (effectively gifting the house to the trust) will be subject to GST and Capital Gains.
2. Others propose that the trust buy the property from the family member?

Is there any way to do this tax effectively. The key motivation overall, is to create an asset base in the trust to make further purchases of property.

Any ways to this this cost effectively? Grateful if you could point to the tax law on this (if not thats ok).

Thanks in advance

 

Not sure I see much difference to your two bullet points, in both cases ownership changes from one individual to 3 beneficiaries of a trust. I believe that in the two cases, the trust (buyer or transferee) would have to pay stamp duty, and the transfer or sale would be a CGT event, so the current family owner (seller or transferor) would be liable for capital gain tax, if any.

 

And why would you not seek legal advice on this ? Yes it will have tax implcations. A CGT event (possibly tax free), stamp duty, legal costs. The reason why needs legal advice. You may be seeking something that may be ineffective or even not permitted but certainly costly. The future CGT lost main residence exemption may also pose some concerns. The trustee may also have highly enhanced risks of being sued in the future - By family.

Using a trust will not produce any more investment opportunities v personal ownership.

 

Thanks everyone.

 

A trust is not an entity but a relationship.
There are 2 ways to 'get' a property 'into' a trust.

The owner makes a declaration of trust - now they hold the property for somoene else
The owner transfers the property to a trustee other than themselves.

Both will trigger CGT and stamp duty.

Another way is to transfer title to someone else who holds it as trustee for you. This can be done without triggering duty or CGT.

GST would generally only apply if new residential property or commercial property.

 

The reason why seems pretty weird.

 

And consider land tax too. A trust may not be exempt and a lesser threshold typically alos applies. In NSW for example the threshold can be as low as $0

 

The motivation is to make an asset base in the trust to purchase more property.

What do you mean by this?

 

Why not borrow against the property and lend the funds to the trust? ensure interest is paid, the loan is documented on arm’s length terms etc.

 

This is an old thread but I am in a similar situation. I assume the original poster implied Example 4 of your thread "Trust Strategies to Increase Borrowing Capacity"
Trust Strategies to Increase Borrowing Capacity

 

Hey Terry, I qoute you here

"Another way is to transfer title to someone else who holds it as trustee for you. This can be done without triggering duty or CGT."

I thought you said there is no way to transfer a property from personal name to a Trust without triggering Stamp duty and CGT?

 

It depends what you mean by 'trust'. Transferring title only is a trust but if there is no change in beneficial ownership it won't trigger CGT, or stamp duty in some states, but absolute entitlement remains

 

Common request = Grateful if you could point to the tax law on this (trusts)

Its not straight fwd. Trusts are a feature of common law (not statute law eg an Act) but states also have trust law that is statutory law and while there is an abundance of case law and the like its far from simple. A trust is a legal relationship and so the trust need to have the relationship defined usually. (But perhaps not always in writing) Even various types and forms of "trust"as Terry indicates above. All can affect duty, land tax, legal liabilities or lack of them, entitelemenst and rights and then centrelink assessment and so much more. And trusts can and will get drawn into family law claims. The legalities are definately a matter for legal advice. Many ask this type of question in the belief some special magic may offer protection from creditors or claims etc. There are many avenues for parties to claw back and attack such efforts.

There are ways to transfer assets in / out of being held on trust without duty but CGT is less probable however a main residence transfer to a trust may still have a CGT event but at that point it may be exempt. And not paying duty may be $0 but be avoidance.

example - Peter owns his IP in his sole name and has a trust setup and settled using a online provider. He has doubts his marriage will last. He thinks the trust may shelter the property that he purchased. He considers the trust (for which he is a human trustee) now owns the asset and commences accounting and tax etc and does this for a few years. He knows the title cant actually change since Peter was the legal owner and would be on transfer so transfer is refused by NSW land titles. They refused it and retains this. Three years later OSR seek information on ownership and certainly the title doesnt show any trust (nor can it !!). OSR ask for where the income is reported for tax purposes. You see the ATO reported that address as a trust owned property and it mismatches with OSR data. ATO wont tell them what trust. OSR raise this and Peter discloses the trust ownership. OSR assess land tax arrears and consider duty but note that the transfer was not dutibale as the transfer cant be "stamped" as there was no change of legal owner. Peter even shows the rejected transfer form (pre PEXA). Just a change of benefical owner and the value is under the duty limit for such tax being applied to a change of beneficial ownership (often $2m NSW) . Peter soon seeks tax advice before legal advice and learns he has no main residence exemption. He thought he did as "he" owns the property. His wife who left two weeks ago will seek to claim on the the property as marital property under a family law claim so Peter now seeks legal advice. Peter also learns his trust wasnt correctly setup. Peter had accounting entries showing the property was gifted. BUT the property had a loan so there never was a settlement for a transfer to the trust. Peter then tries a process to consider anew trust holds his equity in the property and pays a dubious lawyer a lot of money for loads of paperwork to make that official. Peter remains the human owner and the family court later dismiss claims a trust owns the property or that the equity is held in a seperate trust. . Now Peter is really confused - Is the property held in a trust or not ? He paid land tax that says it was. OSR throws hands in the air and says - Take us to court to recover the land tax you paid. We dont know what you did but you showed us trust records. OSR may even assert there really may be a trust and the terms are very uncertain eg NOT in accordance withb the deed. Peter seeks trust legal advice and learns the whole thing is a mess and will be costly to sort and leave him no better off in any way. Costs to seek land tax recovery may even exceed the tax paid. He gives up on that idea. Peter gives up and later his wife gets orders for sale of the house anyway and a money settlement with his ex wife. Only thing that works in his favour is a private ruling that says he never ceased his CGT interest in the property as the trust was not settled and so he got the main residence exemption [This is a real life example I saw.]

Never try DIY clever ideas with trusts unless with sound legal advice and supervision.