Tax Tip 192: Declarations of Trust and CGT

I have outlined what a declaration of trust is here Declaration of Trust – The Structuring Blog and Legal Tip 193: Declaration of Trust

What are the CGT consequences of a person declaring that they now hold an asset as trustee? There is no change in title, so most people probably think there are no tax consequences, but there are.


CGT Event E1 (section 104-55(1) ITAA97) happens when someone declares a trust over existing property they own. This is because there is a change of beneficial ownership, even though the legal ownership remains the same.


Example

Homer holds 100 shares in CBA. He makes a declaration of trust that he now holds these shares on trust under the terms of the Simpson Family Trust deed. No change of ownership has happened, but this has triggered CGT just as if there was a sale of those shares to a 3rd party. If the cost base of the shares was $100,000 and the market value is now $200,000 that would mean a $100,000 capital gain is made (which may then get the 50% CGT discount etc).


(Homer should have sought legal advice as there are ‘better’ ways of doing this)

 

And the trust property may be dutiable = State stamp duty.
eg Homer owns a block of land and finds a Declaration of trust for his daughter.

There can also be benefits of Homer declaring when he acquires property how it has been paid by someone else and that he is a custodian, a trustee.

So important when people seek to do things that could be possible that they seek legal advice early. Sometimes it can be fixed after but it isnt always the case.

 

Assuming you legally own a property (real estate) in Victoria, and declare that it is held on trust, is stamp duty payable on the ‘transfer’? (noting the legal owner of the property has not changed).

I understand that CGT would be indeed be payable given what you have said above.

And ongoing land tax would also change given land tax rates for trust property is different to property held in personal capacity.

 

Yes dutiable even though there is no transfer

 

This concept reflects two issues:

Change of beneficial ownership has or may have occurred and
A change of legal ownership can later be exempt from duty in some cases so duty laws tend to tax changes in beneficial interests as an anti-avoidance rule with limited exemptions otherwise.

There are ways legal ownership can change and not be dutiable but they tend to be limited eg Change of trustee, death, etc

 

An example

Harry holds a property already as both legal and beneficial owner. Harry makes a declaration of trust on his son's 18th birthday that he now holds the property on trust for son. this will trigger both duty and CGT even though no change in legal ownership. this is because the beneficial ownership has changed.

When the son becomes 25 the property is transferred to the son. this doesn't trigger CGT and prob nominal duty because the son was the beneficial owner at this point and it is essentially a trustee transferring to a beneficary.

 

Or we have the catastrophe some create by buying a property in their name or tenants in common with their kids and later look to fix it.

eg Harry tells his son he can assist his son to buy a home. Title is in Dads + sons name. Loan is in both names. In reality Dad seems the property as sons. So does the daughter in law ! Years later son wants to fix things up and the property is now worth a double what it cost $1m). They then learn that Dads share is subject to CGT, duty for son and the bank wants the loan fixed up.

That could have been averted / minimised with legal advice

 

Ive had some success at arguing these arrangements are bare trusts and nil stamp duty on gettig dad off title.

 

Let’s say Harry is the legal and beneficial owner of a piece of land as per your example. He puts property he owns into discretionary trust (he is the trustee), for which he is also a beneficiary (trust deed provides for a wide range of beneficiaries, including himself). Do CGT and stamp duty also apply at that point. Legal title has not changed. Has the beneficial title also changed?

 

You can't put a property in a trust. it would either need to be transferred to a trustee or a declaration of trust made. A discretionary trust has many beneficiaries each who only have an interest which is less than a beneficial interest -a 'mere expectancy' so the beneficial interest would change and it is likely duty would apply in all states and CGT would also apply.

 

There is a issue with "transfer" that probably makes this difficult and is a legal issue to be addressed. BUT....If a person is a trustee of a trust and the potentially sole beneficiary it may mean that Harry still owns the property. eg Harrys trust deed specifies other elligible beneficiaries but Harry is really the only one here and resident. Its dangerous to have a trust setup with such simple objects. Thats the important element of legal advice. Yes a CGT event occurs but in some states and depending on the value there may not be a dutiable transfer unless land rich premium threshold is met eg in NSW. eg In QLD it most certainly will be dutiable as the beneficial interest has changed and QLD has an indirect duties rule

The other concern that could occur is land tax surcharge etc. In NSW if care wasnt given to the terms of the trust then surcharge applies. (It may even exclude potential beneficiaries and confine the beneficiaries to a single person. The trust may end with merger so Harry is the legal and beneficial owner if his sole parent for example was to pass away.