Introduction
Trusts have long been an attractive option for persons wishing to segregate any business or professional risk away from their own personal assets.
In particular, there has been a rise in establishing a trust to protect one’s own family home. Whilst asset protection may be a main driver in a person’s decision to purchase their family home in a trust, there are various tax consequences that must be considered, such as land tax and the ability to access the capital gains tax (CGT) main residence exemption.
This article will briefly consider these factors as well as suggest an alternative strategy that may be implemented to protect a person’s family home, where the property isn’t held in a trust.
Trusts, family homes and land tax
Land tax is an annual tax based on the total unimproved value of land held by a landowner. Depending on the State or Territory, various factors will impact on the amount of land tax payable and includes:
(a) the tax free threshold;
(b) whether the landowner is an individual, company, trust or absentee;
(c) the date on which the landowner is assessed to have held land; and
(d) the availability of various concessions and exemptions (such as a principal place of residence exemption or primary production exemption).
Each State and Territory will have different land tax treatments and requirements, but generally, with regards to purchasing a family home in a trust, land held by a trust will have a lower tax free threshold thereby effectively creating a higher rate of tax. In stark contrast, land tax is not imposed in the Northern Territory.
For example, in Queensland, individuals may own land with an unimproved value up to $600,000 before they are liable to pay any land tax (subject to any available exemptions or concessions). In contrast, a trustee of a trust may only own land with an unimproved value of up to $350,000, before they are liable to pay any land tax.
Therefore, home owners should consider the potential land tax liability, if they decide to hold their family home in a trust. An important consideration will be the ability for a trustee of a trust to access a principal place of residence exemption that will effectively exempt the unimproved value of the land of a person’s principal place of residence from the calculation of a land tax liability.
Whilst most jurisdictions do not allow a principal place of residence land tax exemption for land held by a trust, there are some States (such as Queensland) that enables access to this exemption, even if there are certain additional conditions to be met (such as the trust being a special disability trust or a fixed trust).
Trusts, family homes and capital gains tax
The ability to access the capital gains tax (CGT) main residence exemption should also be considered prior to determining whether to hold a family home in a trust.
Ordinarily, the CGT main residence exemption is only available where the family home is owned by an individual residing in the property.
However, it may be possible to access the CGT main residence exemption where appropriately structured arrangements are entered into between the individual and the trust holding the family home. There is tension in utilising such an arrangement, as it requires the individual to effectively hold an asset in their personal name to be able to benefit from the family home.
Alternative asset protection strategies
If, after having considered the tax consequences, it is decided that the tax costs to hold a family home in a trust outweighs the asset protection benefits, there may still be other strategies available to provide some form of protection over a family home.
In these circumstances, a ‘gift and loan back’ strategy can be used. The strategy involves gifting the value of an asset or entity from a high risk to low risk structure without the transfer of an interest in the asset itself. As a result, there is no transfer of an asset which would be subject to CGT or duty.
Whilst related party loans are not novel, it is important to take steps to secure the loan. This step is important as without this, the recipient would merely become ‘another’ unsecured creditor in the case of bankruptcy or insolvency of the asset owner. By registering security over the loan it means that the recipient should be entitled to priority over other creditors thus achieving the asset protection goals without having the home held in a trust.
As with everything, however, there are some factors that need to be considered before entering into such an arrangement, specifically:
(a) whether consent is required, where there is an existing mortgage over the family home;
(b) continual maintenance of the strategy to ‘top up’ any increase in equity; and
(c) awareness of the bankruptcy clawback provisions.
Disclaimer
This information is provided as a guide only and is not intended to constitute advice whether legal or professional. You should obtain appropriate advice concerning your particular circumstances.
