Tax Tip 265: And/or Nominee and CGT Issues

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

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  1. Terry_w

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

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    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

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    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.
  3. Terry_w

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

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    Just come across this again recently where person signed for an off the plan land and a year later, just before settlement a trustee was nominated. $100k or so growth in between. Apparently the accountant not aware of the tax issues.
     
  4. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Have seen cases where the accountant confused the client who went to land titles to fix the error. OSR then reviewed and imposes double duty.
    Its why solicitors should advise before contracts are signed.

    Has a client who bought OTP using a company based on a (former) accountants advice. The unfinished floor of the city building penthouse was millions with more milltions to be spent on finishing it. The issue that emerged was whose name should the fitout contract be in. The former accountant now realised their mistake and suggested HE CHANGE the title. Luckily my new clinet smelled a issue of concern. However she still made a further mistake - she asked an accountant !! I had to take her to meet a solicitor and they were stunned an accountant could even be engaged in legal work. It then took costly legal work to revert title to her without a cent of duty. We did that be proving the company was a custodian and the property was held in a trust. We proved who paid for it...she did. Her main residence exemption was now safe. All that could have been avoided.

    There are provisions in duties law to fix mistakes but you shouldnt fix something without knowing the outcomes first