Tax Tip 298: How to Tax Effectively Transfer a Property to a Trust

A trust is not an entity so you cannot contract to sell to the ‘trust’ unless the trustee is a different person from the current owner. An owner can declare that they are now acting as trustee and that will ‘get’ the property ‘into’ a trust (a declaration of trust) or transfer it to someone else, by contract, who will act as trustee – including a company.

There are some tax issues – either will trigger a CGT event and stamp duty, but the main concern should be deductibility of interest (and asset protection plus estate planning on the legal side).

I recently come across a case where a person ‘transferred’ a property to themselves as trustee. There was no money paid and the property was rented out. The issue that has come up now is that the person wants to borrow to buy a new main residence and doesn’t have enough cash to pay for it meaning they would have a large amount of non-deductible interest for the next 20 years or so.


The way to do it would be

a) Seek Legal advice about whether this should be done and how to structure the trust and trustee;

b) Set up a corporate trustee so that you are not contracting with yourself;

c) Enter into a written contract of sale with the trustee;

d) On the transfer put the full market value;

e) The trustee should borrow to pay you for the purchase – ideally 105% of the purchase price;

f) You might have to lend the deposit to the trustee as well.

g) The trust can then deduct the interest on the loan as it has borrowed to acquire an income producing property.


Example

Homer has a $500,000 main residence in QLD. It has been paid off for a while now. He wants to move into a new main residence, but has no cash meaning he will have to borrow 105% to buy it. At 3% p.a. in interest that would be $15,000 per year (slowly decreasing over time).

Homer seeks legal advice and decides using a trust would be good for a variety of reasons. He might get his accountant to do some income projections too.

Homer sets up Homs Pty Ltd which will act as trustee for the Simpson Family Trust. He enters into a standard contract of sale with himself selling it to Homs Pty Ltd for $500,000.

Simpson Family Trust has no assets other than $10.

Homer arranges $400,000 loan with Homs Pty Ltd as the borrower. He then enters into a loan agreement where he agrees to lend it $130,000 at market interest rate so it can pay the deposit and duty.

At settlement Homer receives $500,000 from the trust with him simultaneously lending it $130,000. Homer walks away with $370,000 in his hand as the bank lends the trust the rest.

Homer then goes out and buys a new property for $500,000, putting down a $100,000 deposit and borrowing $400,000 from a different bank.

Homer then debt recycles the deposit he paid lent the trust.

Homer then can debt shuffle the rest so the trust ends up getting owner occupied interest rates on nearly its whole debt.


Note that the same thing could have been done with a company, or a spouse or other related person – other than a SMSF.

 

And just as a person could transfer a property to a trust (through a declaration of trust) there are ways a trust property can be lost to a trust without a change to legal title. Typically by making a specified beneficiary entitled to the trust property.

1. Vesting the trust
2. Trust merger could end the trust. When the legal onwer (trustee) and beneficiaryy are the same person the trust ends
3. Other acts which evidence a end to the trust existence

This can be harder to do with a discretionary trust but is certainly not unseen. Quite easy to do with a unit trust especially where the trustee is a human. When the sole unitholder and trustee are the same the trust merges. A CGT trigger potentially and a duty concern in some cases. And potentially without settlement and consideration paid.

Rule #1 with trusts is to neither create or change a trust in any way without legal advice. Never ever discuss changes to a trust or ending or creating a trust with your tax adviser. Start with a legal adviser. A common issue during insolvency events is a concerned person may seek to act to protect personal or trust assets. And if they lack financial resources they seek to do it themselves without seeking sound advice. Major imapcts can occur. And the acts may be subject to bankruptcy or insolvency clawback in any event.

 

Terry, you are a gem in the rough - you have contributed greatly on PC.
One day you will be a shinning diamond.

I will know who to contact when I need things done later.
Keep up the good work Terry.

 

A diamond is a fossil under enormous pressure

 

@Terry_w the $130k deposit lent to the trust isn't a debt to homer though. What am I missing?

 

Homer lent it to the trust so it is a debt

Sorry i didn't proof read

 

Are there any additional asset protection advantages by having the trustee company name being different from the trust name, instead of having them named the same Eg. Simpson Pty Ltd atf Simpson Family Trust or Simpson Pty Ltd atf Simpson Super Fund (being a SMSF). Maybe harder for people to search and see they're linked together?

 

Not really. A name is just a name. But having them different names can give some additional privacy.

 

Not at all. ASIC company trustee details are public data but must be purchased. Nobody knows in what capacity either. Eg. Simpson SMSF pry Ltd may have nothing to do with a smsf and Smith Pty Ltd could be trustee of three trusts.

 

One of my clients is considering this now as a way to improve serviceability. Good for debt recycling too.