Helping an Elderly Parent Buy a new property

Get some legal advice before trying this.

Some people want to help their elderly parent(s) purchase property. This might be the parents moving to a more suitable property or the parents becoming owners instead of renting.

Helping the parents into a property can also help the children too, because they may potentially inherit the property at a later date and there can be great tax concessional along the way.

There are basically 3 main ways an adult child could help a parent into a property:

a. gift

b. loan – at interest or interest free

c. purchasing part of the property.

There are various estate planning consequences to each of these and also practical consequences.

Some things to consider:

  • if the parents own the home it might be 100% CGT and land tax exempt, if the child owns part it may not be completely exempt.
  • If one child made a gift and they have siblings and the parents die before they gift giver then the other siblings may also benefit from the gift.
  • if it was a gift and you died the next day after making the gift your family would potentially miss out
  • If it was an interest free loan and nothing done for 6 years it could become unenforceable
  • If they have incorporated a testamentary discretionary trust in their will and it the gift all came back to ‘you’ this could provide tax free income to your minor children for years to come.
  • If you gift it and parent A dies first parent B might remarry…

An example of how It could work

Bart and Lisa are adults with one parent left – Homer. Homer lost his house years ago and is renting. Bart and Lisa each have their own homes fully paid off and some cash in the offset accounts to their separately owned investment properties.

Bart finds a property with development potential. It is just around the corner from where Homer lives in his rented flat. Bart is going to purchase the property and is deciding what entity to put it in when he has an idea.

The property purchase price is $500,000. He has enough cash to pay for it so he could just buy it outright, but since his dad is not getting a main residence exemption for CGT Bart talks to Homer, his dad, and they decide to buy it in Homer’s name.

Homer signs the contract and Bart lends him the 10% deposit with a promise to lend him the rest for settlement.

Bart then realises that if Homer dies his sister Lisa will end up with half the property. So to make things fairer he talks to Lisa and gives her 2 options

  1. Lisa put in 50% of the purchase price at settlement, or
  2. Homer leaves the whole property to Bart and Lisa agrees not to challenge this if it happens.

Bart and Lisa decide to ‘go 50/50’ and each lend Homer $250,000 and Homer settles on the property. It is a 5 year interest free loan which they intend to renew each 5 years.

Bart arranges various approvals and the property is now worth $1mil when Homer dies 4 years later.

Under the terms of the will of Homer 50% of his assets would go into each of 2 testamentary discretionary trusts with one controlled by Bart and one controlled by Lisa.

They each now have 50% of an additional property which would be could be sold tax free or held onto with a cost base of $1mil. There has been no land tax along the way because this was Homer’s main residence and they have each gained further tax deductions by using cash in their offset accounts.

Furthermore, any income generated from the property from that point could be streamed to their minor children, as beneficiaries of the trust, with each child getting around $20,000 without having to pay tax.

Just before Homer’s death they also forgave the loans they made him – so this meant that an extra $500,000 was driven into the testamentary discretionary trust so they could generate even more tax free income.

Discuss at:

            Legal Tip 208: Helping an Elderly Parent Buy a new property            https://www.propertychat.com.au/community/threads/legal-tip-208-helping-an-elderly-parent-buy-a-new-property.39377/

Written by Terryw Lawyer at www.structuringlawyers.com.au

An Example of How poor Ownership Structuring Can be Painful.

Homer and Marge own 5 investment properties all jointly as Joint Tenants. All in NSW and with a combined land value of $1,200,000.

Homer is on the top marginal tax rate and Marge doesn’t work.

They have reached their borrowing capacity.

They have just paid off their main residence and are saving about $10,000 per month.

Issues

  1. Land tax

Combined land tax is $9,236 (2018 year)

If they have owned $600,000 worth of land each then there would be no land tax

  • CGT

If they sell any investment property 50% of the gain will go to Homer. They can’t divert the income to Marge.

  • Paying Down Debt

They have excess cash, ideally this would applied to Marge’s debt as she would pay less tax. But as all the loans are joint they are stuck with reducing the debt relating to both Homer and Marge

  • Offset Accounts

Similar with the cash savings/buffer. It must go into an offset account liked to a joint loan so Homer’s income will increase.

Death Planning

Because they own everything as joint tenants if one dies there is no opportunity to get half of the assets into a testamentary discretionary trust. This will result in extra tax being payable after the death of one of them.

Possible Solutions?

As they have reached their borrowing cap there may not be much they can do if they cannot qualify for a loan. But they could consider

  1. Spouse A selling 50% of the property to Spouse B.
  2. Selling on property and buying a replacement in Marge’s name only
  3. Save up and lend cash to a trustee of a discretionary trust which will buy property and then divert the rental income to Marge
  4. Sever the Joint Tenancy so they hold the existing properties as Tenants in Common in equal shares – no duty, no CGT and easy to do without triggering a loan reassessment. They could then each leave their shares of the properties to the trustee of a testamentary discretionary trust controlled by the other spouse. Half the rents could then be streamed to the children potentially tax free.
  5. Etc

An Example of the Unfairness of QLD Land Tax to Non-Resident Citizens

There are recent amendments to the laws relating to land tax on properties located in QLD and they can oppressively burden Australian citizens living overseas. Many Aussies have invested in property in QLD and then gone and lived overseas for lifestyle and or living costs hoping to enjoy their retirement by living in their rental incomes. But they are now being taxed so high that many will either need to come back to Australia or sell their properties.

QLD is the only state that taxes Australian Citizens like this.

The issue is that there are different land tax rates for ‘absentees’. Australian citizens who are outside of Australian for more than 6 months canfall into the definition on ‘absentee’. The absentee doesn’t get the $600,000 threshold like non-absentees – their threshold is just $350,000. Plus the rate they pay is higher too. On land worth $1mil the absented rate is 1.7%but the non-absentee individual rate is just 1%.

Now there is also an ‘absentee surcharge’ that goes on top of the absentee rate. For land valued at more than $350,000 the rate is 1.5%.

This means on land worth $1mil the land tax rate would be 3.2% – every year.

Here is an example of how harsh in can be:

John is retired and has a property worth $800,000 with a land value of $500,000 in QLD.

He is getting $500 pw rent, or $400pw after costs. It is fully paid off and this would be John’s only source of income when he quits his job.

John goes and lives in Myanmar where it is cheap to live as he can live like a king on $400 per week.

Poor John didn’t factor in land tax.

Before leaving Australia there was no land tax payable.

Now, since he is living overseas he will be classed as an ‘absentee’ owner as he is not ordinarily residing in Australian.

Section 31 Land Tax Act 2010 QLD.

http://www.austlii.edu.au/cgi-bin/viewdoc/au/legis/qld/consol_act/lta201090/s31.html

Because John is an ‘absentee’ Schedule 3 of the Land Tax Act applies to determine the rate of land tax John will pay.

Part 1 is the general rate and it is charged at $1,450 plus 1.7 cents for each $1 in value more than $350,000.

This equates to $4,000

Ouch!

But it gets worse, because Schedule 3 has a Part 2 which imposes a Surcharge Rate.

Therefore there is an additional 1.5 cents payable for each $1 in value more than $349,999.

In John’s situation this will be $2,250.

John’s total land tax went from $0 to $6,250 per year.

Poor John is now living on $280 per week. His income has been cut in half almost.

And this is before we even consider the Commonwealth tax issues of him living overseas and possibly being a non-resident for income tax. This could leave John was extra income tax of about $4,728 per year.

This would mean his annual post tax income has gone from around $20,000 to $9,821 or $188 per week.

Next year there could be a jump in values which may result in even more land tax (but possibly no increase in rents).

Poor bastard!

Forgotten land Tax

I have met some people who have forgotten to claim land tax and/or thought they were exempt but were later caught out. Land tax can only be claimed in the year in which it relates to – not the year in which it was paid. ATO ID 2010/192 (now withdrawn, but law still current).

In some cases it will be too late to amend tax returns and these land tax costs will not be able to be claimed for prior years.

I had a call from an old friend who has a trust which owns 3 rental properties in NSW and has held them for about 10 years – yet they have never paid land tax and didn’t really know about it until I asked him how much he was paying.

The problem is when the property is sold the land tax clearance certificate will not be clear and he will have a large sum payable before settlement. Yet they will probably not be able to claim more than 2 years. As the trustee is liable this will also affect the distributions the trust has made and it will be messy to fix so there would be additional tax agent fees.

So if you haven’t done so already register for land tax and pay it as it is incurred.

Written by Terry Waugh, lawyer at Structuring Lawyers, www.structuringlawyers.com.au

Land Tax Trap when moving into a rental property in NSW

In NSW land tax is assessed on a person’s land holdings as of 31 December each year. The principal place of residence (PPOR) is generally exempt from land tax so it is commonly thought that it might save you land tax if you moved in to a rental property just before 31 Dec as opposed to just after as the taxing date is 31 December each year.

 

However, there is a bit of a trap for young players with this as the legislation is designed to try to prevent people moving in for a brief period and claiming the exemption and moving out again.

 

The legislation for this is found under Part 2 of Schedule 1A of the Land Tax Management Act 1956 (NSW).

Clause 2(2)(a) states that for a property to be the principal place of residence of a person it must be occupied since 1 July.

 

But there can still be a hope because the next subclause (b) gives the commissioner some discretion in applying (a). If you can convince the Commissioner that the land is occupied and used as the PPOR you can still have a chance of getting the exemption.

 

The way to get the discretion exercised is not to try to call up Revenue NSW and ask to speak to the Commissioner, but to submit a private ruling application, outlining your case with the evidence and make your case.

 

Example

Bart has several investment properties in NSW but still lives at home with his dad. Bart wants to avoid land tax on the most expensive property and his tenants are moving out in Dec on 28th. Bart plans to move in on the 30th Dec 2018 and out of the property again on the 2nd of Jan just before his new tenants move in.

Bart won’t be able to get the PPOR land tax exemption because he hasn’t lived there since 1 July 2018.

It is unlikely the Commissioner will accept that this is the PPOR of Bart because Bart is only moving in for a few days.

Written by Terry Waugh, CTA & lawyer at Structuring Lawyers, www.structuringlawyers.com.au