Tax Tip 265: And/or Nominee and CGT Issues

Discussion in 'Accounting & Tax' started by Terry_w, 13th Jan, 2020.

Join Australia's most dynamic and respected property investment community
  1. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

    Joined:
    18th Jun, 2015
    Posts:
    35,863
    Location:
    Australia wide
    It seems some people out there advise people to sign contracts with XX ‘and/or nominee’ so they can substitute a different person or entity to settle on the property. i.e. the contracting entity is different to the end ownership entity.

    This seems to be pretty popular in Victoria – possibly because of the stamp duty laws there. A contract can still be in one name with the settlement in another name even without the and/or nominee.

    This is a dangerous strategy for a number of reasons, one of which is CGT.


    What happens when this is done is that it triggers a CGT event C2, section 104-25 ITAA97. It could also be CGT event E2.


    A contract is a ‘bundle or rights’ – assigning those rights is the CGT as would be disposing of those rights.


    Example

    Homer acquires a development site in Victoria and negotiates a loan settlement. He starts the process of apply for subdivision approval and then nominates a company as trustee of a discretionary trust at settlement. The trustee becomes the owner of the property.

    Homer is up for a $100,000 capital gains tax event because the property was purchased for $500,000, but with the passage of time and the DA for subdivision it was worth $600,000 at settlement.

    Poor old Homer has to pay $25,000 in tax even though he received no money or benefit from the nomination.


    You might think if you have a 30 day settlement this would not matter. But it is still a CGT and you will still need to record it in your tax return incurring extra tax agent fees – and possibly run the risk of the ATO arguing there was a jump in price.


    For this and other reasons the contracting party should be the party that settles the property.
     
  2. Paul@PAS

    [email protected] Tax, Accounting + SMSF + All things Property Tax Business Plus Member

    Joined:
    18th Jun, 2015
    Posts:
    18,486
    Location:
    Sydney
    I wish I had $1 for the question "Can I sign as nominee and create a company / trust etc""....

    My stock standard answer is - IDK. Seek legal advice. I could then put $10:$1 on the next question.....But can I?

    And I cant recall a single instance where a solicitor then advised it would be OK to establish the company or trust sometime later.

    I cant and dont give legal advice and would have dire concerns with substituting a entity that didnt exist at the time of a contract being made. Only a solicitor should give this advice. Getting it wrong could be very very expensive incl income tax, CGT, GST and stamp duty issues.
     
    Pingu1988 likes this.

PFA Property Expo is designed in a way that visitors can gather maximum real estate knowledge with added benefits. Different speakers will be presenting on different topics as where to buy, when to buy in this market...