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

Discussion in 'Accounting & Tax' started by Terry_w, 22nd Oct, 2015.

  1. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    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.
     
  2. Kangaroo

    Kangaroo Well-Known Member

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    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 ?
     
  3. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    The trustee could possibly claim $10 worth of expenses!
     
  4. Rob G

    Rob G Well-Known Member

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    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
     
  5. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    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