Tax Tip 50: Minimising duty on Spousal Transfers

Say a NSW house is owned by Mr A and it is currently the main residence of Mr A and Ms B (spouses). A and B want to move out to rent this and to buy a new main residence. But the current property loan is fully paid off and they have no money for the purchase of the new Main Residence. This will mean more tax and more non deductible interest will be payable as they will have to borrow to buy the new property.

So they devise a plan for Mr A to sell to Ms B for full market value. Only trouble is full duty would be payable of the value of the property.

They could save more than half the stamp duty by doing this in 2 stages.

Stage 1
Mr A sells 50% of the property to Ms B so they end up as tenants in common owners 50/50. No duty would be payable in NSW if this was done while it was the main residence. Ms B borrows to acquire the 50%.

Then

Stage 2
Mr A sells his 50% share to Ms B. Duty would be payable on the value of the transfer = 50% of the property value. Ms B then borrows more money to acquire this share of the property.

End result is property fully owned by Ms B with only half the stamp duty and a fully deductible loan (probably with 102% LVR too!!). On a $1mil property this could save them approx $22,500.1

Mr A pays cash for the new Main Residence and Ms B claims all the interest on the investment loan - which indirectly means they are claiming interest on the main residence. On a $1mil property this could mean an extra $50k pa in tax deductions for as long as they own the property.

 

Whats the timeframe required between stage 1 and 2?

And should Mr A sell at full market price to enable more cash received?

 

The legislation doesn't have a time frame, but the longer it is the less it will look like an avoidance scheme.

All transfers should be at market values for tax reasons and asset protection reasons.

Don't try this without legal advice either.

 

Agree. s284E of the Duties Act could be applied.

 

Can this applies to mother n son, or father n son or A n B must be a couple?

 

Spouse. Defacto relationships incl provided they satisfy the requirements as a spouse.

Your spouse includes another person (of any gender) who:

• you were in a relationship with that was registered under a prescribed state or territory law
• although not legally married to you, lived with you on a genuine domestic basis in a relationship as a couple.

 

Generally no stamp duty concessions unless death happens or acting as trustee etc.

But the strategy may still be worth investigating.

 

What would you consider a sufficient time frame Terry? With 50% bought the mortgage begins immediately and the PPOR cannot change to IP yet without 100% bought.

Can you explain what would be the benefit of selling at market value?

 

I don't understand this comment.

As for time frame you would want to get legal advice on the antiavoidance provisions.

Say the property is worth $500,000 and you sell it to your spouse for $400,000 then your spouse could only claim interest on $400,000 worth of loan and not $500k. You both have missed out on claiming more tax deductions. CGT and stamp duty would be assessed on market value anyway.

Say you later go bankrupt - this is an undermarket transfer which could be attacked.

Say you die within 3 years of the transfer, this is a transaction which could be attacked under the succession act nsw..

 

Following on from "Yson's" post, is there some way a mother & son or father & daughter to be in a defacto relationship? lol

If same gender couples are allowed why not something a bit more creative like incest being allowed to take advantage of this too?

 

The term spouse does not include incestual relationships or even a polygamous relationship. I did see a OSR detection of a muslim spouyse transfer that failed this issue last year - when to appeal and lost. Anti-avoidance may apply to this anyway.

There are other ways for a parent / adult child acquisition to be managed with legal advice... Apparent purchaser provisions ? Fixed trust arrangements ? Maybe partitioning sometimes. etc

 

Incest is probably illegal anyway!

 

Not even probably.

 

Incest is an action not a relationship. I dont think its "illegal" from a duty perspective. The problem is the relationship fails the test of spouse. Hence dutiable.

 

Quick question regarding adding a 2nd name to an investment (once PPOR) property.

In partners name as purchaser, but both our names listed through bank finance. Currently Valued (RP) between: $405k / (avg: $467.5k) / $530k.

I read all comments, saying it's free stamp duty in Vic. Which only sounds/reads like it's for a sell from one owner the the next (not joint owners).

My question is how does one work out the other legal things involved, like CGT?

Was told by our tax advisor last year it could be a good idea to have both listed for tax reasons. But the cost to add my name could be high.

Also, forclosing and opening up a new bank loan, would it be even worth it to go through all the broker hoops again?

 

You will need specific advice. Transfer will be a CGT and that may mean CGT is payable unless an exemption applies.

Loans would need to be paid out and mortgages discharge and new loans entered into.

Many other legal issues to consider too

 

This may help
Legal Tip 230: Checklist for Transfers between Spouses Legal Tip 230: Checklist for Transfers between Spouses