A worry for some people is that if they become
shareholders of a company, they could somehow become liable for the debts of
This is not the case unless the shareholders
give a personal guarantee or become directors of the company perhaps.
Bart invests in Barney Pty Ltd which is a
construction company. The company has virtually no assets. One day one of the
staff members is seriously injured and sues the company. The company collapses
and Bart is worried ‘they will come after him’.
This is generally not
possible because Bart is a separate legal person to the company. His shares
will be worthless, but there is where it ends.
However, there are some limited exceptions to
this rule those for cases of fraud, the company acting as agent for the
shareholder, shadow director roles, shams, parent companies and subsidiaries –
all of which are very rare.
The King v Portus; ex parte Federated Clerks
Union of Australia (1949) 79 CLR 42
“The company…is a distinct person from its
shareholders. The shareholders are not liable to creditors for the debts of the
company. The shareholders do not own the property of the company…” (at 435)
I often see discretionary trust deeds which
nominate the next appointor, upon the death of the current appointor, to be the
Legal Personal Representative (LPR) of the last appointor upon their death. On
death the LPR of the deceased is the executor or administrator of the will.
This is a bad idea!
Homer has set up a trust without getting legal
advice. Homer is the sole appointor of the trust and there has been no thought
given to what happens after his death. The deed is worded in such a way that
the LPR of Homer will become the next appointor. The trust holds assets of
approx. $2mil when Homer dies.
What could happen?
will appoint his mate Barney as his executor – Barney is now appointor of the
trust and removes the current trustee and appoints a company he controls, or
nominated executor refuses to act and it ends up being the public trustee that
becomes the LPR. They would immediately remove the trustee and appoint a
trustee that they control. This would be much safer than Barney being in
control, but they may have different ideas on who can benefit from the trust,
Thelma could be the only one that applies for Administration of Homer’s estate
as he died without a valid will. She is the LPR. Now she is the appointor of
the trust. She is also a beneficiary of the trust and the trust deed permits
the trustee to act even though there may be a conflict of interest. Thelma
could milk the trust and benefit herself at the expense of Homer’s children
practically speaking, the LPR is only appointed once the courts have granted
Probate or Administration. This could take 6 months of more. So until this
happens the trust will be without an appointor. If the deceased person was the
trustee or the sole director and shareholder of the trustee company the trust
will be under no one’s control until the LPR is appointed. This means no access
to bank accounts, no ability to make a beneficiary presently entitled to
income, of it crosses the end of June, which means the top marginal tax rate on
all trust income. Any sales of property won’t be able to happen, contracts
entered into may not be able to be completed – litigation potentially
Solution – seek legal advice about appointing
a successor appointor now, via a separate deed. If the trust deed doesn’t allow
this, seek legal advice on having the deed amended to allow it.
Keep any clause relating to the next appointor
being nominated in the will as a back up, and avoid having the LPR being the
The main residence exemption only applies to
land with a residence on it – a hint is in the phrase ‘main residence’!.
If you were to demolish the house and sell the land you could be in for a nasty
surprise as there would likely be CGT applicable. GST might be an issue also.
Homer purchased a main residence in 2010 for $1mil.
It was dilapidated when he bought it and it has only become more run down
since. Luckily the land value alone is now worth $2mil and Homer is negotiating
with a developer.
They agree on $2mil on the condition that
Homer remove the house.
Homer knocks the house down and stays in a 5
star hotel with a butler service for the full 42 day settlement period. It will
cost him about $40,000 but, heck, he has earned it and deserves it for making a
$1mil tax free capital gain.
Later Homer does his tax return and finds out
that the main residence exemption cannot apply!
No problem says Homer, the value didn’t
increase much by him knocking the house down.
However, Homer is shocked for a second time
because the cost base of the property will be, basically, the purchase price
plus costs such as stamp duty and a few other fees and charges and the
demolition cost. Perhaps $1.1mil in this case. This could mean a capital gain
of about $900,000.
That would be about $450,000 additional income
for Homer, how as head scientist at Lucas Heights is already on the top tax
rate which means he has made a mistake of about $211,500 plus the $40,000 for
Had Homer sought advice there may have been a
way to structure this so that the main residence exemption remained, and the
Strategies to keep the exemption may be to pay
for the demolition after settlement, or to give the developer possession before
settlement or just reduce the price by the cost of demolition.
State has its own legislation similar to the s37A
the above sections mean is that a transaction entered into with the intent of
defeating creditors or putting property
out of reach of the trustee in bankruptcy (if you were to go bankrupt) could be
attacked. This can even apply to future creditors.
So, take care in how you do things, especially related party transfers such as changing title on property, declaring trusts or moving cash.
Discretionary Trusts (TDT) are the best sort of trust out there, but someone
has to die for them to come into existence. So, they are relatively rare. Also,
the capital of the trust has to come from the deceased for the extra tax
benefits to work (excepted trust income).
cringe when clients approach me wanting to wind up a TDT that their parent has
left them in control of.
idea usually goes something like this. I have a $1mil loan on my main residence
and the trust holds $1mil worth of assets. If I wind up the trust, I can pay
off my home loan and save interest.
a valid point, but once a TDT is closed it can’t be reopened again, and even if
kept open new capital can be injected, but income generated from it would not
qualify as except trust income and would not get the concessional tax treatment
in the hands of children.
is a simple way around this though, and that is to get the trustee to make you
an interest free loan.
dad Homer dies and leaves $1mil to a trustee of a TDT set up under his will.
Bart has a $1mil home loan so winds up the trust and pays off the loan.
is in the same position, but she controls a separate, but identical trust. Lisa
gets the trustee to lend her $1mil interest free which she uses to pay off her
loan. She has not no deductible debt now. So, she uses the $3,000 she was
paying the bank each month to pay back the trust.
trust now has money with which to invest. The income from these investments can
go to Lisa’s children tax free – because they can each earn $20,000 pa tax free
so it will be ages before the trust’s income is more than this.
Bart is making the same investments as Lisa, but he receives the income himself
and is taxed at 47%
the next 15 years or so Lisa would have probably repaid the full $1mil back to
the trust so it is now generating about $40,000 per year in income which comes
out tax free to her kids.
the kids start working, she will have to reassess where the income goes, but
until then there are huge savings.
Tip – Don’t wind up a testamentary trust without careful consideration and legal advice.
Note that this would also give great asset protection as well.
an investment property which he wishes to transfer to a special disability
trust for his daughter who has a severe disability. Title is transferred from
Homer’s name to that of a professional trustee and there is no stamp duty
charged on this transfer.
there are also CGT exemptions available too.
Offset accounts are great and most people should have at
least one offset account, but there are situations where an offset account is
Three situations I can think of are
with low cash savings, and unlikely to have cash savings
the interest rates are higher on offset loans
there are large annual fees
Loan product with an offset account is 3.8% and without an offset account is 3.4%
Interest on $100,000 at 3.8% = $3,800 interest on $100,000 at 3.4% = $3,400
The question is at what point does 3.8% rate equal $3,400 and working backwards this seems to be $89,474. so this means $10,526 in an offset or more could result in savings
Therefore, interest on $100,000 at 3.8% with $10,526 in an offset = $3,400 Interest on $100,000 at 3.4% with no offset =$3,400
So this means unless the borrower has $10,526 in the offset, or more, they would be better off without an offset account.
Also offset loans often have a $395 annual fee. So that might mean about $20,000 is needed to be ahead.
Another situation where an offset may not be needed is
where a person intends to smash the loan down and has no intention of
investing. But in these cases I would probably suggest an offset account
because circumstances change unpredictably.
Working as a trainee lawyer in a small suburban firm I heard
a staff member, who wasn’t even a lawyer, tell a conveyancing client that the
relevant date for CGT purposes is the date of settlement and not the date of
contract. How wrong she was.
Generally*, where a capital asset is purchased or
sold under a contract the relevant date for CGT purposes is the date the
contract is entered into, s 104-10(3)(a) ITAA97 (CGT event A1).
Timing is very important if an investor wants to sell the
property about 12 months after buying it because a few days difference can mean
a lot of extra tax .
Bart buys a property on 28th of June for
$500,000– he enters contracts on this date, but settlement is on 28th
of July. The relevant acquisition date for CGT purposes is 28th of
June. Bart gets a keen buyer interested in the property and they want to sign
the contract to purchase it on 27th of June the following year for
$1mil with settlement on the 1st of August. Bart thinks, great that
is more than 12 months from settlement to settlement so he thinks he will get
the 50% CGT discount.
But Bart is wrong because it is the contract dates that
count – 28th of June this year and 27th of June next
year. Less than 12 months so no 50% CGT discount.
Bart’s capital gain is $500,000
Had he sought advice and waited 2 more days his capital
gain would have been $500,000 still, but the taxable capital gain would have
been halved to $250,000.
Timing is also very important as to which financial year the
gain will be taxed in.
Lisa is selling her investment property and is in
negotiations with a prospective buyer. It is late June and Lisa wants to make
sure the gain is taxed in the next financial year as she will be off work all
year and will have no income. This year she has already earnt $200,000 in
Lisa signs contracts on 1 June this year with settlement
on 15th June next year. She thinks the relevant date is the
settlement date. The gain before the discount is $200,000.
If the sale falls into this financial year the tax would
If the sale falls into the next financial year the tax
would be $25,717
(based on 2018 and 2019 tax rates respectively)
*Note that I said ‘generally’ at the beginning above, and
that is because there are instances where the relevant date is the settlement
date, and sometimes it is somewhere between the date the contract is signed and
settlement happens. I will cover these in a future tax tip.
Below are some ways in which CGT may be reduced on the sale of an
investment property. But before you decide to sell you should properly work out
what the potential size of the capital gain will be. Once you know what you are
dealing with you will then be able to work out appropriate strategies to reduce
the amount of tax payable.
1. Timing of the sale
Usually it is the date of the contract entered into that is the relevant
disposal date for CGT purposes. Some things you can do:
a) Bring forward the sale so that it falls into a year of low income, or
b) Push back the sale so that if falls in a later year where you expect
to have lower than usual income. Delaying the sale can also allow for more time
to plan and implement other strategies.
c) Time the crystallising of losses (see below)
d) Make sure you have held the property for the full 12 months for the
50% CGT discount
2. Offset Capital Gains with Capital Losses
Capital Losses can be used to offset capital gains. Losses can result
a) Carried forward losses from prior years, or
b) Current year losses arising from the sale of other assets.
Bring forward the sale of other property or shares that have dropped in
value may help. But you have to get the timing right. Selling the shares with
the capital loss in a later tax year to the sale of the property with the
capital gain will result in no offsetting and the capital loss being carried
forward to be offset against some future potential capital gains.
Take care with the sale of shares and then immediately buying them back
as the ATO may want to deny the deduction as they can deem this to be a wash
sale with the sole purpose of a tax benefit.
3. Claim everything possible
When working out the capital gains tax the cost base of the property
needs to be worked out. Various expenses incurred during ownership can be used
to reduce the amount of CGT payable. So it is essential not to miss any
potential deduction as this will result in more tax being payable.
See my tax Tip on this: Tax Tip 76: Calculating the Cost Base for CGT
4. Small Business Concessions
Often overlooked are the small business concessions which may be used to
reduce the CGT (sometimes to nil) where the property has been used as part of a
There are 4 main small business CGT concessions, namely:
a) the small business 15-year exemption
b) the small business 50% active asset reduction
c) the small business retirement exemption and
d) the small business rollover
@MikeLivingTheDream first gave me the idea of using the 4 small business
5. Reducing your Taxable Income
Any capital gain is added to your other taxable income for the year so
look at ways to reduce your income. There are 2 aspects to working out taxable
a) Earnings, and
Either reducing earnings or increasing deductions will result in less
tax, Combine the 2 and your savings will be greater still.
5a. Reduce Earnings
Not many would want to reduce their earnings, but here are some suggestions
for those that do:
• Taking that leave without pay that you always wanted may work in well
with reducing your earnings;
• Salary sacrificing into super can also reduce your taxable income;
• Change from full time to part time;
• Quitting to travel the world.
• Where self-employed you may be able to delay income.
• Salary sacrifice into super
See Taking a Year off Work to save CGT
Before prepaying interest, you should consider the flow on effects for
later years – where you will have little to no interest claimable which may
result in more tax payable. Also, be aware that you cannot just pay into the
loan, but must actually fix the loan for 1 year and
5b. Increase Deductions
Having greater deductions will mean you have less taxable income. Some
ways to increase deductions, other than the usual claiming everything you can,
• Prepay interest on other investment properties
• Deductible contribution into super where possible.
6. Die in your investment property
As you approach death move into your investment property with the
biggest gain and rent out the main residence.
Usually, it is difficult to get the timing right on this one!
investors end up selling a property or shares at a loss. They may have borrowed
to acquire the property or shares but the sale proceeds may not be enough to
pay out the loan – they probably would have used another property as security
for at least part of the loan.
circumstances it is possible to keep claiming the interest on the loan in these
cases even when there is no income coming in.
a property in a mining town for $500,000 and he borrowed $400,000.
property dropped in value to $300,000 and the bank has let him sell the
property but to continue with an unsecured loan of $100,000 (it does happen).
the interest on Bart’s loan would continue to be deductible as long as he does
not try to artificially increase his benefits by extending the loan term,
increasing the loan etc. Also, Bart’s case would weaken if he happened to have
$100,000 cash in a savings account.
If you are
going to be selling at a loss seek tax advice well before hand so you can
potentially set yourself up for much more in tax savings which could help you
reduce the pain on the loss.
advice well in advance of selling – from your tax agent or tax lawyer.
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.
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.
basically 3 main ways an adult child could help a parent into a property:
b. loan –
at interest or interest free
purchasing part of the property.
various estate planning consequences to each of these and also practical
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…
of how It could work
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.
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.
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
the contract and Bart lends him the 10% deposit with a promise to lend him the
rest for settlement.
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
in 50% of the purchase price at settlement, or
leaves the whole property to Bart and Lisa agrees not to challenge this if it
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
arranges various approvals and the property is now worth $1mil when Homer dies
4 years later.
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.
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.
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.
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.
For a trust
to exist there must be at least one beneficiary, but there is no legal
requirement that the beneficiary must be alive at the date the trust is created
(as long as there are one or more other beneficiaries that are alive).
yet in existence can be beneficiaries by their relationship to someone else.
set up a trust under his will for his children and grandchildren. His children
are the Primary Beneficiaries, they are named or better yet, not named but
listed by Homer as “my children” – just in case he has more kids after making
the will. The Secondary Beneficiaries would include ‘my grandchildren’
with all of his children being about 12 years old or less with no
grandchildren, but 20 years later when Homer’s son Bart has a son, that son
will automatically be a beneficiary of the trust set up 20 years earlier
because he is a grandson of Homer.
important estate planning and tax consequences as the grandchildren could be
earning $20k per year and not paying any tax.
Under s118-150 ITAA97 a person can claim the main residence
CGT exemption for up to 4 years prior to occupation of a house being
constructed once it is completed – if they live there for at least 3 months and
do not claim another property during this time.
What would happen if the owner died during construction and
could not live there for 3 months?
Luckily there is a concession which covers this scenario and
can be found at s 118-155 ITAA97.
The surviving joint owner of a joint tenancy or the LPR of the estate can
choose to apply the main residence rule for the shorter of 4 years before the
death or when the individual acquired the land.
Homer and Marg are renting and buy land with the
intention to build on it. The land has skyrocketed in price, but after 3 years
they still have not done anything with it. They then realise time is running
out so enter into a contract with a builder. Homer suddenly dies from radiation
poisoning. If Marg is a joint tenant owner she will become sole owner bypassing
the will. This legislation allows Marg to claim the main residence exemption on
the whole property from the date it was acquired as long as she moves in within
the 4 year period from purchase contracts.
If Barney was Homer’s executor and they held it as
tenants in common it could still be CGT exempt as long as it is completed in
time. In this case Barney doesn’t need to move into the property for the
exemption to apply but it can be passed via Homer’s will as if it was Homer’s
main residence for the 4 years prior to his death.
These are trusts, usually set up under a will, where
property is left to a person on an undisclosed trust for someone else.
Homer dies and leaves $100,000 cash for his mate Barney,
but leaves it to Ned on the understanding that Ned gives Barney $100 per week
for the next 100 weeks (so Barney doesn’t waste it all in the first week).
Barney is not recorded as the beneficiary under the will.
Naturally there may be problems with enforcing these trusts
as no one may know about them other than the trustee. The beneficiary may
realise or find out though but even then they will probably have difficulty
proving the trust if there is no written evidence. As such you really must
trust your trustee when doing this.
There is also the half secret trust, and that is when the
trust is partially disclosed in the will. For example the will might say that
Ned is the trustee (using above example) but not who the beneficiary is or the
terms of the trust. This might have a higher chance of being enforced as it is
evident that there is a trust, but not who for and for how long and how much.