With the current housing market so difficult to enter, parents naturally want to help their children where possible. However, such an arrangement should be entered with your eyes wide open and with careful guidance from a tax expert due to the many unforeseen tax implications that can arise in these scenarios.
We meet with a lot of parents who have purchased property for their children and then wish to transfer that property to their child once their child is able to take over the mortgage. Often, the child has paid all the expenses in relation to the property to date, but was not able to get the mortgage in their own name at the time of purchase. In these scenarios, it is clear that the parents have purchased the property with an intention to transfer it to their child. What they generally do not know is that the transfer of the property to the child is taxable. Sometimes the client is aware of that. I have heard the response “oh that’s fine, we’re not going to make a profit” more times than I care to remember. It is not always possible to transfer the property at the historical purchase price. When determining the transfer price, it is necessary to consider the various rules for the transfer of property between associated persons.
I am also regularly told “we will just wait until after the bright-line period, then transfer it”. This is not a bright-line tax issue and no period of time can make this transaction tax free. The acquisition of a property with an intention or purpose of disposal means that the property is held on revenue account and will be subject to tax on sale. We note that it does not even need to be the dominant purpose or intention, and that intention or purpose does not even need to eventuate. If, at the time a property is acquired, there is an intention or purpose of disposal, then the eventual disposal will be subject to tax.
The next thing to consider is that there are flow on effects with this transaction. When one party sells property to an associated party, the party that purchases the property will be subject to the same tax treatment as the vendor. Therefore, if the parents held the property on revenue account due to acquiring it with an intention of disposal, then the children (as transferee) will also hold the property on revenue account. Not only are there no time periods for the application of this provision, but there are no exemptions at all. Therefore, the children (if associated person with their parents under any of the associated persons tests) will hold this property on revenue account and pay tax on it regardless of it being their main home or them living in it for the next 20 years.
The ‘associated persons’ rules are extremely wide ranging. Common "associations" are two relatives, companies and shareholders, settlors and trustees (of a trust), companies with a common owner, trustees with a common settlor, settlor and beneficiary, trustee and appointor, and under the tripartite test two rules can "daisy chain" to associate via a third party. The land tax rules limit the application of the associated persons rules in some instances, but frequently, parents remain associated with their adult children via one or more of the tests. For this reason, it is important to be aware of who is associated for tax purposes, and for the land tax provisions, and consider what structuring can assist for such transactions. If the parents have already purchased the property but the transfer to the child has not occurred, it is possible that some structuring could be used to ensure no further tax is created after the initial taxing event.
Family Trusts can also cause significant issues when parents want to assist their children onto the property market. Sometimes, parents will assist their children to purchase a property but keep ownership of that property in the Family Trust. This can be beneficial for creditor protection, and to a lesser extent, for relationship property purposes. However, it is important to understand the tax implications. When the family trust purchases the child’s home and the child lives there, they generally expect that if the property is sold within the bright-line period, then they will get a main home exemption and no tax will be payable. Unfortunately, even if the child lives in the property it will not be the “main home” for the purposes of the bright-line test. A trust can only have one main home, and that needs to be the main home of the principal settlor. In this scenario, the principal settlors for tax purposes will be the parents who put the money into the trust, and not the child. At present there is a 10 year bright-line test, but we do anticipate that this will be reduced significant once the new Government has been formed.
We’ve all heard the saying “No good deed goes unpunished” and it certainly is relevant when it comes to parents assisting their children onto the property ladder. There are many ways in which parents can help their children onto the property ladder, but careful tax planning is required in order to ensure there are no nasty surprises when it comes to the tax.
This article is intended for informational purposes only and should not replace specific advice. For personalised advice on all tax issues please contact us.
This article was accurate at the time of publishing.
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