Strategy: Incorporating Parents into Property Planning

Discussion in 'Legal Issues' started by Terry_w, 29th May, 2016.

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  1. Terry_w

    Terry_w Structuring Lawyer and Finance Broker - all states Business Member

    18th Jun, 2015
    Strategy: Incorporating Parents into Property Planning

    Sometimes I see missed opportunities for families to group together and work for the greater good – which is saving tax. Both sides can also benefit from the arrangement.

    One example – Parents without a main residence

    Elderly mum and dad are renting a property owned by the son. Son is negatively gearing the property as all done on an arm’s length basis, but the property is subject to CGT because it is rented out. It is also potentially subject to land tax. As well the rents will rise with the market and the loss will soon become a positive resulting in more tax being payable.

    One partial solution may be for the son to live in the property to get the 6 year rule, but he would still only have 1 main residence at any one time that is exempt from CGT.

    Another solution is to have the parents buy a property in their own name(s). This way the family group will have 2 properties exempt from CGT, land tax and income tax.

    One Potential Issue
    Parents may not be working and/or may not qualify for a loan.

    Potential Solutions
    1. Son lends them money – cash from the offset account
    a. At interest
    b. Interest free​
    2. Son lends them money – borrow from LOC and on-lend
    3. Son gift them money
    4. Son jointly purchases with them and get a bank loan
    a. Tenants in common 1/3s each
    b. Tenants in common ½ each to the son and one parent
    c. Tenants in common 10/90 or 10/45/45 with the son having the small amount​
    5. Help them get jobs! So they can then qualify for finance.

    Potential Benefits of the parents buying
    The parent’s main residence will generally be exempt from CGT when it is sold. The family now has 2 properties which are CGT exempt.

    Where the son in part owner this portion will not be exempt from CGT, but as the portion is small the effect of tax will be minimal.

    Land Tax
    Because the property is the main residence it is exempt from land tax.

    Older people generally die before younger.

    If one parent dies and that parent is an owner their share could be left to either:

    - Other parent
    - Son
    - Testamentary discretionary trust
    - Other family member(s)​

    Which one is chosen will depend on the family situation.

    If the son dies first his spouse could miss out though.

    Asset Protection
    Not owning the property it will be better protected from creditors of the son but also future spouses and potential family law issues. It can also be protected from falling into the wrong hands if the son dies first.

    On the flip side if the parents end up bankrupt the property could be lost. The parent’s estate could also be challenged and the property lost that way – other children, former spouses, dependants etc could all get at the property potentially.

    Further Tax Benefits
    If the property passes to a discretionary trust under a will (testamentary discretionary trust) then the son could stream rental income from the property to his children who will be taxed as adults – each getting the tax free threshold. Huge potential tax savings with this for the next 80 years not to mention asset protection advantages.

    Other potential benefits could be related party loans in the future. Parents may be able to save more of their pension in the offset account and lend this to the son who could pay them a commercial rate of interest – taking care not to affect any pensions.

    Depending on the situation the parents may even take advantage of the 6 year rule and rent the property out.

    Social Security
    Generally buying a main residence won’t affect social security unless that residence is worth more than a certain amount.

    Potential Risks to consider

    - Parents go bankrupt
    - Parents wills challenged
    - Parents leave property to someone else
    - Parents mortgage the property and use the cash (reverse mortgage)
    - One parent dies and the survivor remarries
    - The child dies first
    - etc​
  2. Marg4000

    Marg4000 Well-Known Member

    18th Jun, 2015
    Main benefits would be if son an only child.

    Otherwise family issues could be more damaging than paying a bit of tax.
    Poppy likes this.
  3. JohnPropChat

    JohnPropChat Well-Known Member

    10th Sep, 2015
    "Help them get jobs! So they can then qualify for finance." - I thought banks don't like giving out loans (especially 30 year term) for PPOR if the borrowers are old.
  4. Terry_w

    Terry_w Structuring Lawyer and Finance Broker - all states Business Member

    18th Jun, 2015
    It all depends.
  5. Ritzzz

    Ritzzz Member

    28th Dec, 2017
    Interesting one Terry. Where do you reckon I could read up on using trust structures to firstly jointly buy with the parents/lending them the money interest free, initially qualify for PPOR and subsequently rent it out under the trust structure while taking benefit of the parents nil tax bracket?

    Whose serviceability will be used in the event the parents dont work but are permanent residents?
  6. Terry_w

    Terry_w Structuring Lawyer and Finance Broker - all states Business Member

    18th Jun, 2015
    Not much written on trusts, try my legal tips for starters.

    If the parents buy the property in their names the trust cannot rent it out. It would only be the lender if I understand you correctly.

    The structure could be structured to use the income for servicing from any person basically