Hi
This is my first post so I appologise if this has already been covered. I have spent the last 2 hrs reading past posts and have learnt a lot already.
My scenario is this. I am moving house to take a job in another state. The house we currently have cost us $400K (existing loan $160K) and is likely to be worth $550K-600K in 2-3yrs. I want to hold onto it and rent it out while we are away (we may or may not be back), but I would also like to purchase another house to live in at our new location. I am sure this sounds familiar to everyone. I have spoken to a solicitor and he has advised me to form a company and sell the house to the company for a realistic if not slightly inflated price to cover future CGT issues. I am obviously MD of the new company. How does this compare to setting up a trust. The solicitor indicated the Australian government are critically evaluatng trusts at present and catching people out. I realise with a trust in my name I will be elligible for a 50% cut in CGT but this is offset somewhat by the increased initial selling price to the company. Does the company pay stamp duty ? Is it at the same rate as individuals ?
Any advice appreciated.
Richard
Richard
The uncertainty you have as to whether you are moving or not creates some difficulties. There are some options available.
Option 1 Hold both properties in your own/you and wife’s name. The advantage with that is if you sell your principle place of residence (PPOR) its exempt from CGT and the IP is at 50% CGT. This way one property is always free of CGT. If your current house will increase greater than your new house then you can keep that house as your PPOR for 6 years. That way if you move back it is still CGT free.
Option 2. Selling your house to a company will incur Stamp duty and no 50% CGT exemption. Stamp duty is the same for individuals. If you sell your house to the company for an inflated price and it is obvious this will raise the Tax office eyebrows. This is the worst option tax wise where you will pay the most tax.
Option 3. Selling your house to a trust or buying your new house in a trust. You will have to pay stamp duty. The main reason the government and tax office is cracking down on trusts is people moving personally earned income through them and splitting their income. This is a big no-no by the tax office. Also your future plans in regards to IPs aren’t specified so I wouldn’t recommend a trust unless you are going to have 3+ IPs in it.
From what I’ve read in your post I would recommend option 1. I’m interested in why your solicitor would recommend a company or trust for two properties?
Kevman
Does your solicitor want you to sell your current house to a company? or the new house to be purchased by the company?
I would avoid using a company in either situation beacuse of the CGT issues. A 50% discount could be a lot of money.
If buying a new house, I would suggest just buying it thru a trust. This way when you sell it you can get the 50% discount and then diburse the capital gain as you please (between you, spouse, children, grandparents, company etc).
If referring to your current house, I would just leave as it is. Stamp duty etc may make it not worth it. Then if you move back into in future you will have to pay rent to your company or trust.
Yes companies must pay stamp duty and I beleive that it is the same rate as for individuals.
ps. I don’t know what the hell i am talking about!
Terryw
[email protected]Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Hi bigboy.
Both Kevman and TerryW make good points. A company is almost certainly the worst structure in which to put appreciating assets. There is no CGT discount and the company is taxed at 30% on profits, and you are then taxed again at your own tax rate when the co. profits are distributed.
Research using a trust if you think you will be buying multiple IP’s. Remember, your solicitor may not be a tax accountant as well!
I suggest that most members of the Govt use trusts themselves and won’t introduce changes that adversely affect themselves or their families…Terry
FinanceThanks for the advice everyone.
Kevman, what did you mean by “If your current house will increase greater than your new house then you can keep that house as your PPOR for 6 years. That way if you move back it is still CGT free.” I thought if we rented it out it is no longer our PPOR and we will incur some CGT even if we move back and sell it in the future. What is the significance of 6 years ? How do you keep ypur IP as your PPOR for 6 years?
You are correct that the uncertainty of moving back or not creates some difficulties.
Thumbs down to the company idea which is what I thought after doing some research. To be honest, the whole trust scenario sounds too difficult also in this case. I will consider it if I buy another property that I know will be soley an IP.
Regards
Richard
Michael
Thanks for the clarification. This is an excellent forum. I have since downloaded the CGT guide at the ATO and will read it thoroughly. How paticular are the ATO about mailing adresses. I have no problem in calling House 1 in NSW our PPOR and have all the existing NSW mail diverted to QLD, but should I continue to tell everyone at my new location in QLD that my address is still in NSW. i.e if I get a loan for House 2 in QLD surely they would not accept my old address in NSW as my current address. I hope the ATO are reasonably flexible on their mailing address rulings. God that is confusing, I hope you understand what I am trying to say.
Regards
Richard
OK I understand the 6 year CGT exemption on PPOR becoming IP. Now what if you move out of your PPOR it becomes IP and the second house that was going to become an IP is now your PPOR. Move into the new intended IP and claim it as your PPOR everytime you buy a new place. Will you get 6 years CGT exemption on each proprty that has been your PPOR. then sell each IP before the 6 years is up and pay NO CGT.
Tell me it couldn’t be this easy to avoid CGT.
If it is so I will be moving every 6 months which is how often I’ll be buying.
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