CGT on Main Residence when land over 2 Hectares

I had a client recently who was selling this main residence. He was shocked when I told him it would not be fully CGT exempt as it was about 8 acres in size.

The main residence CGT only applies to a dwelling on land of up to 2 hectares in size. So when the land is larger than 2 hectares only part of the property will qualify for the main residence exemption.

See s118-120(3) ITAA97.

Note that the 2 hectares can be selected on the most valuable parts of the land which need to be adjacent to each other. For example you might have the land under the house on one side and the land under a shed way down the back, but not count the land in between them.

See TD 1999/67

https://www.ato.gov.au/law/view/document?DocID=TXD/TD199967/NAT/ATO/00001

Which includes this diagram:

See the discussion at: https://www.propertychat.com.au/community/threads/tax-tip-205-cgt-on-main-residence-when-land-over-2-hectares.39214/


Written by Terryw tax lawyer at www.structuringlawyers.com.au

Transferring a Property from a Testamentary Trust to a Beneficiary Without CGT

Trusts are generally considered the greatest British invention, (the sandwich comes in second), and Testamentary Discretionary Trusts (TDTs) are the best of the best.

The main benefit of a TDT is the ability to get income into the hands of children and have them taxed as adults.

Another main benefit of TDTs is the ability to transfer a property owned by the trustee of the trust to that of a beneficiary of the trust without triggering CGT. This means an inspecie transfer of assets is possible without CGT.

Example

Homer dies and leaves his property portfolio indirectly to his children by establishing 3 separate TDTs in his will. Bart’s trust will hold 3 properties, as will 2 more trusts controlled by Bart’s sisters.

Bart has 5 children, so is able to distribute the $100,000 in rental income to the children tax free each year.

After a while the kids grow up and start working so any further distributions will result in tax being payable at high rates. Bart decides to reduce the tax by moving into the most expensive property and living there rent free. Then he realises that the property is subject to CGT as it is held by a trustee and the main residence exemption won’t apply.

Bart decides to use the ATO’s concession and transfer the property from the trustee to himself as a beneficiary under the will.

He gets a private ruling first and this confirms the Commissioner will not treat this as a disposal for CGT purposes because it is a transfer from a deceased estate to a beneficiary.

Note however that this is not law, but a concessional treatment by the Commissioner as stated in Paragraph 2 of PS LA 2003/12 https://www.ato.gov.au/law/view/document?docid=PSR/PS200312/NAT/ATO/00001

“… the Commissioner will not depart from the ATO’s long-standing administrative practice of treating the trustee of a testamentary trust in the same way that a legal personal representative is treated for the purposes of Division 128 of the ITAA 1997, in particular subsection 128-15(3).”

See also PBR 99991231235958 – Questions 1 and 2

also PBR 1012603789935

Discuss at

https://www.propertychat.com.au/community/threads/tax-tip-194-transferring-a-property-from-a-testamentary-trust-to-a-beneficiary-without-cgt.38844/

Fee-HELP and Deductibility of Course Fees

If you are studying a course relating to your current employment and you defer payment of the fees by using Fee-HELP will the fees still be deductible even though you do not pay it upfront?

Yes.

ATO ID 2005/26 states:

“Even though the taxpayer has obtained a loan for all or part of the fees for the course under FEE-HELP, this does not preclude the taxpayer from claiming a deduction for the expenses incurred in relation to the course.”

Example

Bart is a registered tax agent and is doing a Masters in Tax course and decides to use Fee-HELP to defer payment of the course because he is low on funds at the moment. So he enrols and incurs the debt of $10,000 for his subjects. He can claim a $10,000 deduction, save about $3,000 in tax, and not have to directly pay for the course until many years later when his taxable income rises above the repayment threshold – which is $51,957 in the 2018-19 tax year.

References

ATO ID 2005/26

https://www.ato.gov.au/law/view/document?docid=AID/AID200526/00001

See also these recent private rulings:

Authorisation Number: 1051472588169

Authorisation Number: 1051479369722

Authorisation Number: 1051479812479

Authorisation Number: 5010056303358

Discuss at

https://www.propertychat.com.au/community/threads/tax-tip-198-fee-help-and-deductibility-of-course-fees.38948/

How much can be earned without having to pay tax?

For the 2018 to 2019 tax year the tax free threshold for resident taxpayer individuals is $18,200 per year in taxable income. That means earning under this amount results in no income tax payable.

However, a taxpayer could earn slightly more than this and pay no tax because of 2 rebates that are available:

  • The Low Income Tax Offset of $445, and
  • The Low Mid Income Tax Offset of $255.

This means that an individual resident individual could actually earn $21,885 per year and not have to pay tax.

However, if the individual is eligible for the Seniors and Pensioners Tax Offset (SAPTO) they could potentially earn up to $33,000 per year and not have to pay tax.

Check out the calcs at https://www.taxcalc.com.au and https://www.paycalculator.com.au/

Discuss at:

https://www.propertychat.com.au/community/threads/tax-tip-197-how-much-can-be-earned-without-having-to-pay-tax.38936/

Discretionary Trusts distributing income to a SMSF and Tax

We have seen that it can be possible for a discretionary trust to distribute income to a SMSF if the SMSF is a beneficiary of the trust. See my legal tip
http://www.structuring.com.au/terry/super/can-a-discretionary-trust-distribute-income-to-a-smsf/

But just because it can be done doesn’t mean it should be done.

Any distribution from a related discretionary trust received by a SMSF will be classed as NALI or ‘Non Arms Length Income’.

NALI income will be taxed in a SMSF at the highest marginal tax rate.

Income from Fixed Trusts to a SMSF can be taxed at normal SMSF rates, 15% generally, but only where the income is genuine non-NALI income. For example a SMSF owning units in a Fixed Unit Trust which owns a factory. Genuine rent can flow through to the SMSF and be taxed at 15%. But if a discretionary trust distributes income to the unit trust this would flow through to the SMSF but be taxed at the top marginal tax rate.

The reasons for these laws are to stop people diverting income to SMSFs to save tax.

Discuss this at https://www.propertychat.com.au/community/threads/tax-tip-196-discretionary-trusts-distributing-income-to-a-smsf.38915/

Can a Discretionary Trust Distribute Income to a SMSF

A SMSF is a trust and a discretionary trust could potentially distribute to another trust. But, the Trustee of a Discretionary Trust can only distribute income to beneficiaries of that trust if the SMSF meets the definition of beneficiary as defined in the deed. If the SMSF is a beneficiary of the discretionary trust then it would be possible for it to receive income and/or capital from the discretionary trust.

BUT (and there is always a but) – just because it could be done doesn’t mean it should be done. See my tax tip for some of the tax consequences.

Discuss this topic at https://www.propertychat.com.au/community/threads/legal-tip-198-legal-tip-can-a-discretionary-trust-distribute-income-to-a-smsf.38916/

How long can Tax Losses be carried forward?

There is no time limit as to how long you can carry forward losses – whether income losses or capital losses, however they will be lost at death (a loss lost!). So, it makes sense that you should try to use up losses as early as possible. This is generally not too hard with income losses as these are easily eaten up the next financial year with more income being earned.

Using up capital losses tends to be more difficult though as a capital loss can only be used up by a capital gain – not general income.

Note that there are complex rules regarding companies and trusts in carrying forward losses.

Example

Homer invested money in a business he ran which failed. He lost $200,000 and has a $200,000 capital loss which he has been carrying forward for 9 years now. Homer would love to use this loss up, but the trouble is he has no other asset he could sell to offset the loss.

If Homer owned shares for example he could sell shares with a $200,000 capital gain and not have to pay any tax.

But losing his money has meant that Homer doesn’t have any capital to invest with.

However, Homer’s daughter Lisa knows a thing or 2 so sets up a discretionary trust to hold investments. It could be possible that in future a gain from the trust could be distributed to Homer and his loss could offset this so that no tax is payable.

Discuss this topic here

https://www.propertychat.com.au/community/threads/tax-tip-195-how-long-can-tax-losses-be-carried-forward.38902/

Declarations of Trust and CGT

I have outlined what a declaration of trust is here http://www.structuring.com.au/terry/trusts/declaration-of-trust/ .

What are the CGT consequences of a person declaring that they now hold an asset as trustee? There is no change in title, so most people probably think there are no tax consequences, but there are.

CGT Event E1 (section 104-55(1) ITAA97) happens when someone declares a trust over existing property they own. This is because there is a change of beneficial ownership, even though the legal ownership remains the same.

Example

Homer holds 100 shares in CBA. He makes a declaration of trust that he now holds these shares on trust under the terms of the Simpson Family Trust deed. No change of ownership has happened, but this has triggered CGT just as if there was a sale of those shares to a 3rd party. If the cost base of the shares was $100,000 and the market value is now $200,000 that would mean a $100,000 capital gain is made (which may then get the 50% CGT discount etc).

(Homer should have sought legal advice as there are ‘better’ ways of doing this)

Tax on Trust Income not Distributed

Where a trust has income and no one is presently entitled to it, the trustee of the trust will be taxed on this income at the top marginal tax rate because of s99A(4) ITAA36

http://classic.austlii.edu.au/au/legis/cth/consol_act/itaa1936240/s99a.html

Note that the income doesn’t necessarily need to be distributed, it could be retained by the trust yet still be taxed in the hands of the beneficiary if they have been made presently entitled to it.

On present entitlements and trusts see this post I wrote a few years ago:

Legal Tip 87: Trusts and Unpaid Present Entitlements

https://propertychat.com.au/community/threads/legal-tip-87-trusts-and-unpaid-present-entitlements.4718/  

Example

Simpson family trust has $10,000 in income in year 1. The trustee makes Bart presently entitled to the income so Bart is the one that is taxed on this income. The trustee may not physical transfer the money, but if the is the case Bart will still be taxed (and he will have an unpaid present entitlement with the trust, which is similar to a loan). Bart has no other income and pays no tax.

In year 2 the trust has $10,000 in income, but the trustee doesn’t make anyone presently entitled – perhaps they forgot, or perhaps their resolutions were defective.

The trustee will pay the tax at the top tax 47%

Strategy: Take a Wage Haircut and Move to a cheaper area

If you moved to a cheaper area to live and took a haircut on your wage, it might not be as bad as you think. This is can speed up financial independence and reduce stress and give you a better quality life.

Example of a $20,000 wage reduction

After tax income on $100,000 would be $73,883 (2018-19 tax year)

After tax income on $80,000 would be $61,383

So, a $20,000 reduction in gross income means only a $12,500 reduction in real terms

Try working it out yourself at https://www.taxcalc.com.au/

But the real benefit may be the savings with home ownership.

An equivalent house costing say $1mil in Sydney v $600,000 in Adelaide (for example)

Repayments on $1mil at 4% pa are          

  • $4,774 per month for 30 years with Total interest payable $718,695

Repayments on $600k at 4% pa are         

  • $2,864 per month for 30 years with Total interest payable $431,217

The repayments on the smaller loan mean a cash flow saving of $22,920 per year – which more than makes up for the lower wage income.

Furthermore, if you consider commuting times – you might be saving 1 or 2 hours per day living outside of Sydney.

Living costs may also be generally cheaper. Consumer prices are supposedly about 12.75% higher in Sydney than Adelaide:

https://www.numbeo.com/cost-of-living/compare_cities.jsp?country1=Australia&country2=Australia&city1=Adelaide&city2=Sydney
https://www.numbeo.com/cost-of-living/compare_cities.jsp?country1=Australia&country2=Australia&city1=Adelaide&city2=Sydney

Consider also the quality of life.

Conclusion

It can be worth moving out of Sydney and living elsewhere and this can be the case even if you were to take a substantial haircut on your income.