FHOG Qld- Trusts/Buyers in Common & disqualifications

hi Darren

Firstly on trusts

Will being a beneficiary under a trust prevent you from getting the grant later on? I don't think so because:

– Without knowing it you are probably already the beneficiary of hundreds of discretionary trusts set up by your distant relatives.

But that is no help, so look at the legislation. In QLD you will need to look at the FIRST HOME OWNER GRANT ACT 2000

http://www.austlii.edu.au/au/legis/qld/consol_act/fhoga2000250/

section 14 "Applicant or applicant's spouse must not have had relevant interest in residential property".

You then look up the definition of 'relevant interest' which has a long list with s8(2)(a) covering trusts:

"(2)(b) an interest is not a relevant interest in the hands of a person who holds it subject to a trust."

Therefore holding under a trust should not prevent you from getting the grant in the future.

Buying in under the trust.

If you purchased the original house under a trust, the trust would be required to pay stamp duty on the purchase and possibly CGT on the sale too if the value has increased – which it may if you sub-divide it.

There would also probably be GST too as the land would be new. If you built the house first and then sold it, there would be GST on the house too.

But if you are all first home owners you should be able to get the grant to buy the house and land after it is sub-divided.

If you buy jointly

 You should be able to get the grant – just once between you all. When the sub-division is complete you can transfer titles into individual names. I think there is concessional stamp duty to sub-divide into the same names, but if you were to sub-divide into different names then full stamp duty may be payable (not sure on this).

A possible way around this is setting up a deed of partition from the beginning and you each owning an exact portion of the block. Eg. if 1000sqm and A’s block will be 320sqm when finished, then A should own 32% of the land and so on. Partitioning will mean each owner will solely own their own portion even though all names will be on title. If this is done then you may not have to pay stamp duty (or just a nominal sum) when it is divided.

D

You had better consult an accountant as I am not sure.
My understanding is when you sub-divide land you are creating new land. The would probably be GST charged on this if you were to sell it. But I recently purchased some new land, just sub-divided and there was no GST charged. I am not sure why???

I also think if you are transferring the land into different names (from 3 names on the original or 1 name each on the new), then this would be considered a sale. And GST and CGT would apply. I think Richard is saying it won't apply if all 3 names on each title after the split.

Remember that CGT is charged on the vendor when selling an investment property. It doesn't matter if the purchaser intends to live in the place. GST is not normally charged on residential property, but it is (I think) on new property. It is the purchaser who would pay this.

CGT would be payable at the end of the financial year in which you sell. So if you sell now it would be due in your tax return which you must submit by Oct 2009. Gives you some time to work around it and try to reduce it – eg prepaying interest to get your deductions up, delaying other income etc.

It is all ridiculously complicated. I don't even try to keep up with it all now as it is too much effort.

Remember I am not an accountant. (Any accountants out there, Eddie??)

Hi all

Happy Australia Day – well, for yesterday anyway.

Yes, I agree this is confusing – keeping up with the thread has been exhausting enough!

A couple of points as I go through the comments:

Buy through trust

1. Similar to Terry, I don't think having a related trust buy a property and then having you three buying off the trust will necessarily disqualify you from the grant.  Under the disqualifying arrangement provisions, the relevant rule to look out for is whether you entered into the arrangement with the sole or main purpose of getting the grant, rather than buying a home.  Given the nature of the land – the trust is akin to an intermediary, which enables the land to be subdivided, thereby allowing you three to purchase separate homes. 

2. Normally, setting up a two tier arrangement like your suggestion would entail double duty but given the first home concession duty rates, I don't think the secondary sale of the separate titles to the three of you will entail duty, provided that the market value of each property on sale is less than $550K.  In other words, there will only be one lot of duty, being the duty payable when the trust buys the land.

3. Terry's rough estimate of the GST is close.  However, the GST could be a tad lower if the trust can buy the land under the "margin scheme".  To qualify, the trust needs to have bought the land from a vendor who either isn't registered or required to be registered for GST or who is selling the land under the margin scheme.  The GST in that scenario may be:

GST on sale: $1.2M – $400K (cost of land) / 11 = $73K.
GST claimable on development costs: ($100K + $300K) / 11 = $36K
Net GST payable = $73K – $36K = $37K. 

Not exactly earth shattering compared with Terry's figure of $40K.

4. I suspect the trust will not qualify for the 50% CGT discount because it is likely that it will be taken to be carrying on a one-off profitmaking undertaking, regardless of the period of ownership of the property by the trust.  Therefore, the CGT payable will be more like $60K each.  Ouch.

5. I sympathise with your comment that the government is seeing the trust and yourselves as different people, even though in reality, all you are all trying to do is to buy a home.  However, you need the same rationale to qualify for the grant.  In other words, it is difficult to "have your cake and eat it too".

6. In summary, this is not a good result – you pay GST and income tax of $37K + (3 x $60K) = $217K to qualify for the grant of $14K x 3 = $42K.

Buy as individuals

7. If you buy the land together as tenants in common with a view of building a home on it, you will qualify for $21K in aggregate.  There will not be any GST issue.

8. However, there may potentially be CGT issues when you split the title between the three of you.  That is because, for CGT purpose, each of you may be taken as if you have disposed of two thirds of your one third interest in the land and acquired a third interest from the third interest held by each of the other two parties each (I know – very confusing!).  The CGT liability will depend on the value of the property, relative to its cost base, at the time of the separation of interest.

Potential Solution

9. Given the above issues, in my view, I would try to negotiate with the vendor (eg, pay them more) to encourage them to subdivide the land into three separate titles before your purchase.  That way, each of you may be entitled to $21K without any GST or CGT issues.

10. If you head down this path, you need a good lawyer to draw up the special conditions in the contract, eg, you may need to incorporate an option, which will be exercised upon the subdivision of the land, etc. 

Disclaimer time – as usual, the above doesn't constitute formal advice, blah, blah, blah …. Really encourage you to see an accountant to firm up the advice.  Good luck!

Eddie

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Hi Darren

You left out stamp duty which you would also incur (I think) when you sub-divide the land into 3 different names.

If you build and sell GST would be payable on the building part too as the building is new. If you sub-divided the land and then built, then no GST as you will be living in it. If you were to sell down the track, then none as the property would no longer be new.

The difference in GST treatment between the two scenarios is due to the concept of "enterprise" in the GST Act.

If a trust buys land, builds a house on it, and sells it to someone (whether related or otherwise), the series of activities will likely be treated as an "enterprise" under section 9-20 of the GST Act.  One of the key criteria for GST to apply to a taxable supply is the existence of an enterprise. 

On the other hand, if the three of you buy land, build a house on it for you to live in, the undertaking will not likely amount to an enterprise, which means GST will not apply.   

At law, the tax legislation treats the trust and you (as individuals) as separate tax entities (each entity is treated as if it has a mind and intent of its own).  Further, if you as individuals buy land, build home, and but do not sell the property, there is no supply.  GST is only payable where there is a supply.

Another potential area to investigate is – would the activities undertaken by the trust constitute an enterprise? It's a gray area.  There could well be scope to launch a reasonably arguable position that there is no enterprise.  If it is cost beneficial, you should perhaps consider lodging a private ruling application with the ATO but that probably wouldn't be helpful if you have time pressure to buy the land.  This is where an accountant's advice may be necessary – but only if it is cost beneficial to seek advice.

Your summary of the implications is close but not technically correct.  As I mentioned before, even if you buy the land as tenants in common under a single title, the subsequent subdivision of the single title into three separate titles may give rise to CGT.  Also, my point about no CGT discount is not time dependent – if you look at the trust as a separate entity from yourselves and its activities involve buying land, developing it, and selling it for a profit, then the transaction is characterised revenue in nature, rather than capital.  If the sale by the trust to the three of you is revenue in nature, CGT discount does not apply (the discount only applies to capital transactions). Other than that, you are very warm.

Eddie
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