Tax Tip 15: Transfers for No Consideration and Deductibility of Interest

Discussion in 'Accounting & Tax' started by Terry_w, 11th Aug, 2015.

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  1. Terry_w

    Terry_w Structuring Lawyer and Finance Broker - all states Business Member

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    Transfers for No Consideration and Deductibility of Interest


    This is an obvious one, but people are still not realising the mistake.


    Interest on a loan will generally only be deductible where the borrowed money is used to purchase an income producing asset.


    I have come across several people who transfer property between themselves and their spouse, mainly for tax reasons, and who do this without consideration - i.e. as a gift.


    If you receive a property as a gift you cannot claim any interest on a loan on that property.


    E.g. Jack and Jill are spouses and Jack wants to increase his tax deductions on their negative geared property which they own jointly as tenants in common 50/50. The loan is for say $500,000 but the property is worth $1,000,000. Jack thinks he can transfer Jill’s share to himself and increase the loan to $800,000 and then claim all the interest.


    He goes to a conveyancer who says a contract is not needed and all they need is a transfer. Consideration on the transfer is listed as Nil. Title changes to Jack’s name only. Bank is happy to change the loan to Jack’s name only too.


    Jack starts claiming interest on $800,000 against his income. But he is audited by the ATO and finds out he cannot claim the extra interest because the loan does not relate to the purchase of the property - his new 50% share was a gift. In fact Jack can only claim interest on $250,000 of the loan because this is the amount relating to his initial 50% share.


    Get both legal and tax advice before attempting any transfer of property or increasing of loans.

    See this thread relating to trustee transfers without stamp duty where this issue can also arise:

    Legal Tip 54: Stamp Duty Transferring a property from a trustee to a Beneficiary in WA https://propertychat.com.au/communi...y-from-a-trustee-to-a-beneficiary-in-wa.2684/
     
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  2. Doraemon

    Doraemon Active Member

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    Hi Terry,

    Great Post. Just wondering if you can further clarify on a few of my questions below:

    1) So if Jill did transfer her 50% of share at the market value of $1Mil, then I guess the most of which Jack is entitled to claim interest on the homeloan, would be just that $750,000? (Jack's initial 50% at $250k & Jill's 50% at current revaluation of $500k)...Deductibility of the remaining $50k would be treated under the usual s8-1 of ITAA97 - i.e. the purpose for which the found would be used for? Am I right?

    2) So I guess Jill in the example above mainly transferred the property without consideration for the sake of avoiding the stamp duty which would otherwise be payable on the transfer?

    Thanks in advance of your comments.
     
  3. Terry_w

    Terry_w Structuring Lawyer and Finance Broker - all states Business Member

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    1. Yep, that sound right.

    2. Jill was just being silly. She tried to skimp on legal advice to save money but it cost her a fortune. Stamp duty varies from state to state - nil for market value transfers between spouses in some states.
     
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  4. Doraemon

    Doraemon Active Member

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    Thanks for your share of knowledge! Truly appreciated.
     
  5. phillyc

    phillyc Member

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    Thanks for sharing your knowledge. Much appreciated.
     
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  6. Hamish Blair

    Hamish Blair Well-Known Member

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    So Victoria still has nil stamp duty transfers for PPOR transfers between spouses post 30 June 2017. Spouse and partner exemption | State Revenue Office.

    However up until today (30 June 2017) the exemption from Victorianm stamp duty had no conditions. NOW the exemption only applies to PPOR and the property must be transferred for no consideration. Also at least one party to the relationship must live in the property as their PPR for a continuous period of at least 12 months commencing within 12 months of the transfer.

    So if the property is transferred for no consideration for Victorian stamp duty purposes, what is the cost base for tax purposes (CGT etc). Do the market value substitution rules apply?
     
  7. Terry_w

    Terry_w Structuring Lawyer and Finance Broker - all states Business Member

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    I haven't seen the new legislation for VIC yet, just looked it up but changes not reflected yet. If it has to be transferred for no consideration that is a bummer. It may work out better paying the stamp duty in these situations and transferring at market value so you can claim the interest on the loan.

    For CGT the market value would apply
     
  8. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    Yeah its far tougher now. The nil consideration closes a loophole sometimes. I still believe a cgt transfer occurs at 50% of market value since tge market value sub rule is triggered. I suspect somone will seek a tax ruling on the interst issue arising....its ambiguous as non cash consideration could still be a factor. If a spouse can gift property why not a debt? Eg what stops one spouse assuming their responsibility for a share of a debt?
     
  9. S0805

    S0805 Well-Known Member

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  10. Terry_w

    Terry_w Structuring Lawyer and Finance Broker - all states Business Member

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    A debt can be assigned, but
    I don't think this will work. Debts can be assigned but in this situation there will be a repayment of the loan and new borrowings.

    Worth a try though.