Tax Tip 194: Transferring a Property from a Testamentary Trust to a Beneficiary Without CGT

Discussion in 'Accounting & Tax' started by Terry_w, 2nd May, 2019.

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  1. Terry_w

    Terry_w Broker, Lawyer, Tax advisor Business Member

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    Trusts are generally considered the greatest British invention, (the sandwich comes in second), and Testamentary Discretionary Trusts (TDTs) are the best of the best.

    The main benefit of a TDT is the ability to get income into the hands of children and have them taxed as adults.

    Another main benefit of TDTs is the ability to transfer a property owned by the trustee of the trust to that of a beneficiary of the trust without triggering CGT. This means an inspecie transfer of assets is possible without CGT.


    Example

    Homer dies and leaves his property portfolio indirectly to his children by establishing 3 separate TDTs in his will. Bart’s trust will hold 3 properties, as will 2 more trusts controlled by Bart’s sisters.


    Bart has 5 children, so is able to distribute the $100,000 in rental income to the children tax free each year.

    After a while the kids grow up and start working so any further distributions will result in tax being payable at high rates. Bart decides to reduce the tax by moving into the most expensive property and living there rent free. Then he realises that the property is subject to CGT as it is held by a trustee and the main residence exemption won’t apply.

    Bart decides to use the ATO’s concession and transfer the property from the trustee to himself as a beneficiary under the will.

    He gets a private ruling first and this confirms the Commissioner will not treat this as a disposal for CGT purposes because it is a transfer from a deceased estate to a beneficiary.



    Note however that this is not law, but a concessional treatment by the Commissioner as stated in Paragraph 2 of PS LA 2003/12 Legal Database

    “… the Commissioner will not depart from the ATO’s long-standing administrative practice of treating the trustee of a testamentary trust in the same way that a legal personal representative is treated for the purposes of Division 128 of the ITAA 1997, in particular subsection 128-15(3).”



    See also PBR 99991231235958 – Questions 1 and 2

    Legal Database

    also PBR 1012603789935

    Legal Database
     
  2. Trainee

    Trainee Well-Known Member

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    Terry, will the cost base of the property be passed to Bart? If it was a post 1985 IP, and bart now lives in it, will cg be apportioned based on total years owned including years when owned by the deceased and the TDT when it is eventually sold?

    Linked to that, for a property that is initially ip then ppor and the owner dies, is there cgt if the property is sold within 2 years after death?
     
  3. Terry_w

    Terry_w Broker, Lawyer, Tax advisor Business Member

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    Cost base will be as per normal for a deceased estate - either value as at death if it was the main residence of the deceased or the cost base of the deceased if an investment property - generally.
     
  4. Terry_w

    Terry_w Broker, Lawyer, Tax advisor Business Member

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    I should point out that this would apply only to assets owned by the deceased at the time of their death and not property acquired later by the trustee.
     
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  5. Kip

    Kip Active Member

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    Hi Terry

    Can i ask if this would be the same for discretionary trusts. If a discretionary trusts holds an asset and then transfers it to a beneficiary does this trigger a CGT event? Can we transfer the asset to the beneficiary at cost not MV?

    Any help would be greatly appreciated.

    Regards
     
  6. Terry_w

    Terry_w Broker, Lawyer, Tax advisor Business Member

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    This only applies to testamentary trusts - including discretionary trusts set up in the will.

    However a trustee of a discretionary trust can potentially transfer an asset at cost and not market value, but there will be tax consequences to this, as well as other legal consequences, and CGT is likely to be at market value.

    seek legal advice.
     
  7. Kip

    Kip Active Member

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    Hi Terry

    So if i transfer the asset from the trust to the beneficiary at cost then what tax/legal consequences would i be looking at?

    Also if i sell it at cost, the trust wont pay and capital gains is that right?
     
  8. Terry_w

    Terry_w Broker, Lawyer, Tax advisor Business Member

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    breach of trust potentially, being sued by a beneficiary, market value substitution rule, etc

    seek specific legal advice
     
  9. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

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    Purely from a tax perspective, the CGT market value substitution rule would apply to such a transfer. This would deem that the market value is used for tax purposes in place of the actual value used on a contract. If the property were not input taxed and a element of an enterprise it could also be liable to GST and also would invoke a market value rule to that taxable supply.
     
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  10. money

    money Well-Known Member

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    Let's say Grandpa Simpson owns three properties in NSW, one pre-CGT investment property, one post-CGT investment property and one PPOR (don't think it'd matter if pre or post-CGT). Grandpa Simpson passes away and as part of his will sets up three different testamentary trusts with one of each of the above properties in each trust. Homer or Homer's company is the trustee for each of the three trusts.

    1. Would there be NSW Land Tax charged from the 1st dollar for each property (no land tax threshold), or on both investment properties but not the PPOR?
    2. What happens if after a few years Homer decides to rent out the PPOR?
    3. What happens if Homer keeps all three properties in the testamentary trusts until he passes away then Bart takes over as trustee? Would CGT be due or it will still be CGT free? When would CGT get triggered on all those properties?
    4. If the testamentary trust runs through the whole 80 years, is it possible to extend this or have it roll over into a new testamentary trust therefore deferring any CGT?
    5. If Homer & Marge later divorce, are 50% of the assets in all the testamentary trusts potentially up for grabs for Marge to take just like other trusts? (Grandpa Simpson doesn't want this to happen to his hard-earned money.)
     
  11. Terry_w

    Terry_w Broker, Lawyer, Tax advisor Business Member

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    1. Generally yes
    2. it would produce taxable income which must be distributed by the trustee,
    3. Death is not a CGT event, and neither is passing control of a discretionary trust. The property wouldn't be tax free though as it is held by a trust. None of the properties would be CGT free if held in a trust
    4. not under current laws, except for SA potentially
    5. the 50% is a myth. Courts could potentially make orders to transfer trust property and/or to take it into account in rearranging other assets.
     
  12. money

    money Well-Known Member

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    So the PPOR won't be CGT free (even if it's pre-CGT before 1985) so I presume the date of death of Grandpa Simpson will be the cost base date of the property? Best to get a registered valuer to value the property around that date then I guess to establish the cost base.
     
  13. Terry_w

    Terry_w Broker, Lawyer, Tax advisor Business Member

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    Yes cost base reset at date of death.

    But there is a way to potentially get both land tax exemption and CGT exemption.
     
  14. money

    money Well-Known Member

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    If the property was a QLD property even through the beneficiaries of the testamentary trust were in NSW or another state, same as where the testor lived & made the will, there would be a $350,000 threshold where no land tax would be due if the land was worth less than $350k, is that correct?
     
  15. Terry_w

    Terry_w Broker, Lawyer, Tax advisor Business Member

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    Probably
     
  16. FXD

    FXD Well-Known Member

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    Terry,

    - Do all such transfers trigger stamp duties?
    - ANy variation to the treatment at time of transfer, if the assets suffer capital loss and any tips
    to deal with this situation?
    - For properties that are still with mortgages at death, do/can/will lenders object to the transfers?
    What is the usual and common process?

    Thanks,
    FXD
     
  17. Terry_w

    Terry_w Broker, Lawyer, Tax advisor Business Member

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    It depends on the situation and state.

    If the property is mortgaged the mortgage needs to be discharged which might mean refinancing or paying out loans.
     
  18. FXD

    FXD Well-Known Member

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    For Victoria, I should have been clear about the question.
     
  19. Terry_w

    Terry_w Broker, Lawyer, Tax advisor Business Member

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    that is something you will need specific legal advice on. But in Vic there are concessions and exemptions for transfers from trusts to beneficiaries