So, my father built a H&L in NSW about 24 months ago. This was spurred by my sister having difficulty in finding and keeping a suitable rental property (Kingscliffe). The plan was always to have my sister and her husband move in and rent, then buy it once they had sold their Brisbane property and/or received a payout (Which has now been spent). The verbal agreement was they could buy it at the mortgage value. Now, 24 months on, the mortgage value is about 560k, and the bank val is about 730k. My dad is still happy to sell at the mortgage/original cost, but is being told he will be up for the capital gains on the current valuation, as well as someone being up for the appropriate stamp duty. What can he do? It's unfair for him on a personal level to pay CGT given that my sister has let him down, but it will obviously be seen as a CGT event. He is certainly not generous enough to do this otherwise, but he had made the deal beforehand. His accountant sees no way out. Unfortunately, there was no contract or written agreement, even a long settlement at the contract price could have avoided this maybe. (I told him I'd pay out the mortgage and pay the adjusted stamp duty. He didn't find this funny)
Not much he can do now as the horse has bolted! What he could have done is bought it as trustee for your sister originally and it could have been transfered for nominal stamp duty and without triggering CGT. But look at the bright side - he may have made a profit and will be taxed at a maximum of 24% on it. Beats working.
The only things he can do to reduce CGT are: 1. Not sell 2. Keep long enough (12 months) to get 50% CGT discount 3. Sell in a FY that he has no, or reduced, personal income (CGT is levied at his marginal tax rate) SD is the responsibility of the buyers not the seller.
CGT should be added to the selling price. Still a great deal and a big help - but your Dad is not out of pocket.
Alan makes a good point. Can dad just retain ownership of the property and will it to the daughter? Issues to consider 1. Loss of CGT main residence exemption 2. Land tax 3. asset protection - could be improved in some aspects. 4. estate planning. etc
Get your sister to pay your dad's cgt liability, she is picking up the house at a discount. Get a 'favourable' valuation for stamp duty purposes. If he doesn't need to sell, grant your sister a life estate requiring her to pay all expenses, maintenance and outgoings.
It is possible that the apparent purchaser provisions could apply which MAY allow title to be corrected at nominal cost. There could be legal costs in addressing this. The concept behind apparent purchaser provisions is that if a person financially has a property interest (Child) but a nominee is given title (Dad) the "apparent purchaser" (Dad) can revert title to the person with that financial interest. The usual requirement is that there is a contract / deed or other agreement but this isnt always a strict requirement. Other evidence can be used....If Daughter paid $ for the property (deposit etc) and can prove she provided the initial funds for Dad to acquire it you could have a case. Without that you could be in difficulty. I have seen it done on mortgaged property. The mortagee would need to agree to the change in title. The property location will affect this. If its QLD talk to Darryl and RPI and in NSW speak to Peter Bobbin at Argyle Law.
Get advice whether CGT event B1 could apply. Daughter takes possession with the intention that she will obtain legal ownership at a later date. The event is backdated to the initial agreement. Very little capital gain for the father under this provision because it is backdated and daughter may get the main residence exemption while renting but intending to buy/own. Now to consider under state laws whether there could be a nominal stamp duty in relation to gift/undervalue transfer to daughter for natural love & affection.
Out of curiosity. How does CGT work on an option? If someone sells an option to purchase their property for $500k then it is worth $750k when the option is taken? Could this have been a solution?
Granting an option is a CGT event. so CGT payable on the option fee. If the option is exercised the disposal of the property would be another CGT event. I don't think the market value substitution rule would apply if it is transferred for under market value as long as the original option agreement was on commercial terms.
Good info on options and real estate here (ie put / call) CGT events affecting real estate The issue with options is that some events trigger changes in value which require the original value to be amended up or down. Like earn-out clauses in a business contract a series of CGT event values can arise requiring amendments to the original. The Commr generally ignores amendment limits for such events.
The use of options can be a very sound CGT strategy. The benefit of options is abstractly described by the ATO in TR 94/29 amongst discussion of other tax strategies to delay tax payments. I like this tax ruling........ We often see on PC comment made that a CGT event occurs when a contract is made. However this is ludicrous as a taxing concept as it would impose tax on all contracts even if they do not settle. The tax law issues surround this defect (?) are addressed in the tax ruling. (Read para 38) and also in administrative concessions that get little or no comment on PC. I would argue only truly property savvy tax advisers know this stuff. Most accountants would have no idea. Options do not trigger a CGT concern until the option is exercised. This can defer tax. Great benefit. But that doesnt mean a contract with a future settlement imposes a cashflow problem on a taxpayer. A taxpayer who contracts to sell their property in 2017 with settlement in the 2022 year may also have opportunity to defer the payment of taxation of the capital gain until the CGT event occurs and settlement completes. But most accountants will tell you the CGT event is in 2017 and that when the tax is due. WRONG. The tax office allows this under an administrative concession that allows the taxpayer to amend the prior year return (2017) and pay the tax due within 30 days of the settlement in 2022....The prior year return can be amended outside the normal 2-4 year amendment period. Terms contracts can also be a useful strategy in other cases.
My understanding of Division 134: A grants call option to B in 2016 = CGT event D2 in 2016. Capital gain for A if option price exceeds cost of issue. If B exercises the option in 2017 then the original CGT event D2 is disregarded retrospectively with an amended return for A ... no time limit. A has CGT event A1 upon disposal of asset in 2017, capital proceeds includes the original option price. Effectively, option exercise is a notional single transaction consisting of disposal in 2017.
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