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Selling IP to family

Discussion in 'Accounting & Tax' started by Creamy, 22nd Feb, 2016.

  1. Creamy

    Creamy Active Member

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    This is just what I interpret from ATO's website.

    You may also be taken to have received the market value if:
    • you and the new owner were not dealing with each other at arm’s length in connection with the event, such as where property is transferred between family members.

    If that's the case, then it doesn't seem to make much sense to sell for below market value, yet pay tax as if you sold it for market value. Might as well sell it for market value then.

    In my particular case, my old man wants to sell an IP to his brother. However he doesn't want to pay extra tax on capital gains without actually getting the capital gains.

    Purchase price: $380,000
    Intended sale price: $450,000
    Market value: $550,000 - $650,000 (based on RP Data)

    Given the condition of the place, it's not a stretch to say the place might only be worth $500,000 - $600,000.
    1. If an independent valuation is done, does this prove to be dealing at arm's length?
    2. What can be done to reduce the value of the property or valuation? (Still tenanted, can't destroy stuff). Will a building and pest inspection, in conjunction with a valuation, highlighting any possible issues reduce the value of the property?
    3. If an independent valuation isn't done, will ATO do their own valuations?
    4. Am I correct in assuming that even buyer purchases in the name of a trust/company etc, as long as the buyer is the director of the company, a family link can be assumed, therefore not dealing at arm's length?
    Anything I might've missed?
     
  2. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    consider the asset protection aspects too:
    - family law
    - incapacity
    - death
    - bankruptcy
     
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  3. Mombius Hibachi

    Mombius Hibachi Well-Known Member

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    How about answering the question that was asked.
     
  4. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Thank you Mr Lasczuk for your comments. I answered the question asked in the last paragraph.
     
  5. dabbler

    dabbler Well-Known Member

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    Gee Whizz....
     
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  6. Jamie Moore

    Jamie Moore MORTGAGE BROKER - AUSTRALIA WIDE Business Member

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    You'll need to get an independent valuation done for stamp duty purposes.

    I've had lots of clients purchase under market value from the folks - all have required one.

    I'm not sure how you could influence the value of the property.

    Cheers

    Jamie
     
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  7. Greyghost

    Greyghost Well-Known Member

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    Wants to acquire it under market value but acquire the equity that goes with it being under market value.

    Here have my cake and eat it too lol...
     
  8. Daniel Taborsky

    Daniel Taborsky Well-Known Member Premium Member

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    For CGT purposes:
    • Whether a transaction is at arm's length only matters if the consideration for the sale was not at market value. So if the property is sold at market value you don't need to worry about whether the parties were dealing with each other at arm's length.
    • The concept of arm's length is complex - it looks at whether the parties act independently of each other and neither party exercises influence or control over the other. It depends on all the facts & circumstances.
    • The fact the parties are related (e.g. brothers) is a strong indicator that the transaction may not be at arm's length - but that wont always be the case. It is possible for related parties to be acting at arm's length. (The converse can also be true - unrelated parties may be found not to be acting at arm's length.)
    • Using a company which is controlled by a related party is unlikely to change the situation.
    • As we have a self assessment system for income tax, the ATO will initially accept whatever value is used to calculate the capital gain in the tax return. However, if you are audited and haven't relied on a valuation, the ATO will likely get their own valuation and impose penalties and interest if the value used in the return is below market value.
    For Stamp duty:
    • As Jamie said, a valuation will generally be required for transactions between related parties for stamp duty purposes.
    • Stamp duty is paid on the higher of the consideration or unencumbered value. (There's no requirement that the parties were not acting at arm's length before market value can be substituted.)
    • Some State revenue offices expect you to get your own valuations. Other's will order their own valuation (with some passing the costs of that valuation back to you).
     
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  9. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    I could only find a like button. No dislike button ?

    I would add a further off topic consideration to Terry list of important issues. Centrelink.
    If the parents may be subject to pensions or any other forms of Govt support in the next five years (ie aged care etc) then selling for less than market could have +ve or -ve implications for income / assets tests and gifting rules. Advice prior to acting on this issue would be wise.

    Valuation/s should be obtained or considered to determine the range of market value eg $500K may be a relevant value based on specific condition and selling to a immediate willing buyer rather than undertaking a marketing campaign at high cost using an agent. A P&B may indicate flaws which support a lower value.
     
    Last edited: 23rd Feb, 2016
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  10. Creamy

    Creamy Active Member

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    Nothing wrong with trying to get the best deal you can.
     
  11. Rob G

    Rob G Well-Known Member

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    All The Commissioner has to do is substitute a reasonable estimate in an amended assessment and he is deemed top be correct unless you can show that it is not only excessive, but also what a more reasonable amount should be.

    See the Commissioner's position on valuations in relation to CGT assets in

    TD 10W - original position

    PS LA 2005/8 (withdrawn) - previous practice

    Now incorporated into the general ATO website guidance. Just search www.ato.gov.au using the keywords "market valuation".

    If there are related party dealings then this is an invitation for ATO scrutiny.
     
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  12. legallyblonde

    legallyblonde Well-Known Member

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    The usual... Just let the yard go crazy and inflict superficial damage that is easily and cheaply fixed ;) Or are the valuers onto this trick already?

    P.S. I am making assumptions. I have no experience with valuers.
     
  13. legallyblonde

    legallyblonde Well-Known Member

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    Oh the irony!

    @Terry_w is a legend and has an amazing ability to make us aware of issues we aren't even realise we have! *sneeze* loan contamination
     
  14. legallyblonde

    legallyblonde Well-Known Member

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    I would assume it is similar to renting for market value... AKA you can take into account costs that you have saved by not paying agent commission ect and deducting this from the market value.
     
  15. Rob G

    Rob G Well-Known Member

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    Be careful.

    State revenue laws are all different and most certainly distinct from income tax.

    For example, state laws may have nominal or reduced duty for certain transactions between relatives or for gifts of natural love and affection.

    There is no love and affection in Commonwealth income tax law!
     
  16. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    And I have seen and heard of related parties innocently submitting things to OSR for related transfers that can be dutiable instruments. eg agreements for sale by instalments etc This is definitely an area where legal advice to implement a proposed transfer is important. They will draft the contract and ensure all settles and complies for duty and CGT.
     
  17. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    You also have to tie in deductibility of interest. I have seen people transfer property without consideration but the transferee gets a loan on it. If there is no money paid for the property any loan used to 'acquire' it cannot be deductible.
     
  18. Creamy

    Creamy Active Member

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    Probably playing with fire here but, if you can find a willing agent, what's to stop someone selling a property to a family member through an agent?

    I mean, you're going through a third party but the buyer is still family.

    Now I'm really curious to see how politicians do it...
     
  19. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    This wont change whether thr transaction is arms lenght or not.
     
  20. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    And a likely Part IVA scheme. Agent to cross a contract? Paying fees to facilitate a scheme may may it worse for uncommercial reasons. A lawyer can do this without a agent.