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 Mortgage broker licenced 4 tax/legal advice 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 Mortgage broker licenced 4 tax/legal advice 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 Mortgage broker licenced 4 tax/legal advice 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.