Tax Tip 64: Tax Consequences of a Beneficiary Living in a Trust property rent free

If there is a residential house owned by the trustee of a discretionary trust and if the house is provided rent free then are there any tax consequences?

Generally not for income tax.

There is no income of the trust so nothing to tax. The trust will not be able to claim any interest on any loans used to acquire the property, nor will it be able to claim any other expenses such as rates etc.

There would generally be no Fringe Benefits Tax either as the benefit does not relate to employment. Miscellaneous Taxation Ruling MT 2016 Fringe Benefits Tax: Benefits not taxable unless provided in respect of employment at paragraph 2 states:

• An essential element of the definition of 'fringe benefit' is that the benefit must be one provided in respect of the employment of the employee. Unless a benefit is provided in the context of an employer-employee relationship the tax has no application.

The property will be subject to CGT with no main residence exemption available.

There may be land tax payable where there otherwise wouldn't be if the beneficiary owned the property. But this varies from state to state - there could be an exemption from land tax in VIC for example. In NSW land tax would apply.

Under Trust Law a trustee may be in breach of their powers, and liable for the loss, if they are not expressly authorised to allow an asset to be used by a beneficiary for free.

 

Thanks Terry for providing insights all the time. !!

How about the following situation in theory :
The tenant pays $10 pw instead of the $400 market rate while living in it ? Can trustee claim expenses ? or it has to be arms-length type of thing ?

 

The trustee could possibly claim $10 worth of expenses!

 

Possibly zero deduction, FCT v Groser, 82 ATC 4478: 13 ATR 445.

Possibly the deduction is limited to assessable income of $10, Ure v FCT 81 ATC 4100.

See IT 2167

 

And no main residence exemption.
And no deduction for the land tax which is punitive in NSW +
As Terry says owned by trust and no income then there are no tax issues as such other that long term cost consequences.

Also problems arising from TR 2002/18 and Janmoor type arrangements too if attempts are made to make the rent market related.

Can possibly lead to a ATO audit into related party dealings to determine UPE issues and related entities. The key issue is in such trust arrangements there are invariably problematic "loan accounts" and / or transactions which the ATO may argue as being income to the recipient entity. ie Fred lends $2K to trust so trust can pay land tax. ATO argue its income

 

So can anyone tell me (and quote a reference, if possible) whether the expenses relating to the investment property (e.g. rates, land tax), which can't be claimed as a deduction, will form part of the cost base when calculating the CGT on disposal of the property?

 

Tax Tip 76: Calculating the Cost Base for CGT purposes https://propertychat.com.au/communi...culating-the-cost-base-for-cgt-purposes.5390/

 

What do you mean but this? Land tax etc can be claimed as a deduction. If the taxpayer doesn't claim these costs they could be used to reduce the capital gain on the sale.

 

Thanks so much for the response.
They can't be claimed as a deduction because the property isn't earning rental income. The beneficiaries are living in the property rent-free. I do understand that generally under CGT law the expenses would form part of the third element of the cost base, but I was wondering if there are any issues because of the rent-free aspect. I.e. should the tenants be paying these expenses rather than the trust.

 

Oh I see. So no rent is being charged.

 

Yes, that's right.

 

Maybe !!
If the trust is a unit trust it may not be as clear cut, the actual gain for the unitholder MAY not include third element costs.

 

It could also expose the asset to a matrimonial claim

 

Also relevant to the FBT aspects:
Miscellaneous Taxation Ruling MT 2019 Fringe benefits tax : shareholder employees of family private companies and directors of corporate trustees
MT 2019 - Fringe benefits tax : shareholder employees of family private companies and directors of corporate trustees (Published on 4 October 2006)

 

Hi Terry
If this was being done for asset protection wouldn't it be better to keep the house in own name with a loan from a Trust and the house with registered mortgage.

There would be no land tax. The Trust would have priority over other creditors and later on,, if the Trust was no longer wanted the Loan could be forgiven or settled and there would be no CGT event as already in own name?

 

Well, possibly it would be better off loan that, but the asset protection would be weaker slightly - asset protection on bankruptcy.

If the individual acquired the house they would be the owner of increased value going forward.
For a trustee to take a mortgage the trust will generally need to lend money - this money would need to come from somewhere which is often a gift from the owner or their associate so now you have to contend with the clawback laws.

If a trustee owned the house any increased equity belongs to the 'trust'.
The beneficiary may lend the trust the deposit and the trust mortgages the property to get a loan. Later with any increase the trust might borrow back and refinance the loan from the beneficiary.

But the main advantage in your method is the asset protection on death as the house can be passed on to a testamentary discretionary trust via the will. Inter vivos trust assets cannot be passed on, the control of the trust will need to be passed on and this is the weak link in the chain of asset protection.

 

Deed of apparent purchaser can also be effective when supported by sound legal advice. It covers the change in value. Problem will always be who provides the source of funds for the acquisition. It requires cash although lenders still work but add complexity.

For example Richie Rich seeks to buy a house. Family trust controlled by other family advances $2m to assist the purchase. Family Trust and Richie enter into a DOAP and register this with OSR. Typically they need to prove how the Trust funded Richie. Richie Rich later finds his defacto Stuart Silverdollar wants 50% of his house. Family trust reverts ownership to the trust. Its now not his house. It never really was. He was an apparent owner.

 

I like the sound of this Paul in that if never needed it can remain in the perdon's own name. Would this affect 'Willing' to you descendants and clising off the Trust?
BTW a friend's accountant back in the day set up what he termed a Claytons Deed. It saved his house from a claim by a de facto spouse he had lived with for only a few years. In that case his parents were deemed owners because of that Claytons Deed. The accountant looked after the finances and kept the original Deed for safe keeping but I am not sure how he set it all up as this was all before I became financially/legally "aware".

 

The apparent purchaser is essentially a resulting trust.
Legal Tip 106: Resulting Trusts Legal Tip 106: Resulting Trusts

If the owner of the property is attacked, other people claim to be the real owners.
Like this
Legal Tip 137: Arguing a Trust on Bankruptcy Legal Tip 137: Arguing a Trust on Bankruptcy

If a deed is involved that would complicate things because for tax purposes the beneficial owner should be declaring the income received and claiming the main residence and land tax exemptions. It would essentially be a bare trust
Legal Tip 83: What is a Bare Trust? Legal Tip 83: What is a Bare Trust?

 

Thanks Terry
As always a lot to consider.