Tax Tip 339: CGT before Title Passes?

CGT event B1 can occur where an agreement is entered into and use and enjoyment of the asset passes before the title. The timing for this is at the time the agreement is entered into and not the time of title passing hands.

An example would be someone selling a house on an instalment contract.



Example

Peter owns 123 Smith Street and agrees to sell it to Tom on an instalment contract. The terms of the agreement gives Tom the right to live in the property, but it will not legally become his property until title passes which will only occur when the last payment is made. This could happen in 10 years’ time.

For CGT purposes Peter is considered to have disposed of the property now, at the time of entering the contract and not in 10 years’ time when title passes.



Various strategies can be implemented relating to taxation and estate planning with this concept.



Example 2

Homer wants to help Bart into a new main residence, but Bart is just out of high school and not working yet. Homer is desperate to get him out of the house, Homer’s house, so Homer buys a new main residence and immediately sells it to Bart who has a 20 year settlement period, which can be brought forward. Homer is triggering a CGT even for himself, but there will be no CGT payable as the value won’t have changed in the short period since he bought it – might even be a loss.

Later in 7 years Bart gets a job and the property has double in value so he is able to change title to his name and pay Homer out.

No CGT for Bart or Homer.

(duty would apply though as would other legal issues)



See s 110-15 ITAA97

 

This often occurs with long dated sale contracts with deferred settlements where tax advice wasnt obtained. A way to avoid this can be put/call options which defers the contract event. A common problem with people who agree to sell to a developer with long dated settlement. Its often blended with them moving out and then waiting for sale in 18 months. The main residence exemption wont apply to 100% since an absence exemption doesnt work either.

 

Hi Terry, Paul - this is an interesting strategy/concept. I have an elderly relatively who is luckily in great health but her retirement fund is depleting to maintain a desired lifestyle for the next 15 years. She's considering selling a property to a relative for an initial "installment" of around 1/3 the value of the property in today's price, but she will remain in the residence till the day she passes at which time the remainder of the purchase price will be due (to pass on as inheritance). For the buyer the "perceived" benefit is to take advantage of the current price cycle yet there's no need to outlay additional fund (or even the need to take out a loan) till much later. (the buyer has cash for the 1/3 but not full price)

I wonder if you see this as a sound strategy in principle (I am sure there's other legal consideration as well which in relative terms should be minor).

 

There are a lot of potential strategies. This thread is about triggering CGT event B1 by someone moving in before title passes - which might be something other than your relative wants. She want want to get advice on selling part of the property and getting a life time right to reside. If the property is going to pass to them anyway (if they survive the elderly relo) then selling in stages will minimise stamp duty and help get more CGT exemption along the way.

An alternative might be a loan to the elderly relative.

 

There can be other events which trigger CGT but not involve a change of legal title.

eg Land which is held for investmnet or private use or as a main residence which commences to be held as trading stock. Care has to be taken that this mere construction of a few t/houses or subdivision and sale of land may not be held as trading stock. The land may be held for a isolated profit making purposes which doesnt trigger the CGT event

Another is holding land on trust.
eg Fred owns land. He commences to hold the land as trustee for a trust. He thinks that because legal title is still in his own name there is no CGT. The legal title doesnt change but beneficial title may. This could be a disc trust or even a SMSF.

The trigger of concern is where the legal onwers ceases to hold BOTH Legal & beneficial interests.