How to help a family member who can’t get finance get onto the property ladder without incurring capital gains tax.
Breaking into the property market can be tough, particularly if the would-be buyer does not qualify for a home loan in her own right. In this instance, as an older, more established family member you may wish to assist your child or grandchild make her dream of becoming a property owner a reality. However, understandably you may want to do so without approaching a guarantor.
Fortunately, thanks to a recent private ruling, it is now possible for parents and grandparents to assist other family members, like a child or grandchild, get a foothold on the property ladder without incurring capital gains tax (CGT) on transfer.
The upshot of the ruling is that the transfer of a property title deed from one family member to another family member – what is termed “beneficial ownership” – will no longer automatically trigger a CGT event, as is typically the case in property transfers or sales.
Now, for example, if your child identifies the purchase of a residence they want to live in but is unable to secure the necessary finance in their individual right, you as the parent could assist them until they can demonstrate their ability to meet such a demanding financial commitment.
At this point, your child will hopefully be in a position to leverage the equity realised by an increase in the property’s value to get a home loan or finance of their own, at which point the property can be transferred into your child’s name without being liable for CGT.
How to avoid triggering a CGT event
As the taxpayer who initially purchased the property did not personally gain financially from the transaction, the Commissioner of Taxation determined that in this situation beneficial ownership lies with the family member.
What is beneficial ownership?
Per ATO TD 2017/11, a beneficial owner is described as an entity or person who is entitled to the income and proceeds from an asset. That is, the entity or person in question may hold legal title of an asset on account for another entity or person.
Although ruling TD 2017/11 originally relates to minor’s bank accounts, the ATO has applied the same principle to other properties which are held in trust.
This means CGT doesn’t necessarily apply when the legal interest in a property is transferred from the initial owner to another family member (ITAA 1997 s 104-10(2).
Family ties do not always add up to beneficial ownership
Despite the Commissioner of Taxation’s beneficial ownership ruling, there are several instances where the transfer of a property or home for “natural love and affection” has triggered a CGT event for which the transferor was liable (Zeqaj and Commissioner of Taxation [2016] AATA 218).
Therefore, it is important to ensure you obtain the correct advice based on your specific circumstances. There is no hard or fast rule as to what you must and must not do in these situations but the focus comes back to having supportive evidence around the transaction that can show why the transaction was entered into, and that really it is just because of the bank’s requirements that the parents/grandparents were involved.
It is important to note that beneficial ownership transactions may have state tax implications like stamp duty or first home owner’s grants.
What to help your family member?
If you want to know more about how to help a family member get a foothold on the property ladder contact SMART Business Solutions.
SMART Business Solutions assist you with setting up a “beneficial ownership” trust or navigating the transfer of a property to another family member. Contact us today to learn more.
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You need SMART solutions for YOUR business, not just annual tax compliance! Get the SMART team working with you. Call SMART Business Solutions today on 03 5911 7000 or reception@smartbusinesssolutions.com.au.
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