This article was published in this month’s edition of the Law Society Journal of NSW.
In 1990 David and Debbie inherited two commercial investment properties from their parents as tenants in common in equal shares. Now they want to take one each.
They consult you and welcome your advice that under section 30 of the Duties Act 1997 the properties can be transferred with just $50 duty provided they are equal in value. David says “well, they’re equal in value so far as we’re concerned, but what happens if there’s a difference?”
You explain that if, for example, Debbie’s property has a higher value than David’s, duty will be payable on the amount by which the value of Debbie’s property exceeds half the total value of both properties.
No problems, they both say, so the transaction is documented and finalised.
Sometime later you receive a call from Eddie, who says he is a cousin of David who was most impressed with the advice you gave him on the partition and that he has a matter he would like you to fix.
Eddie is married to Edwina whose father Edgar proposes to hand over the family farm to them both. Eddie and Edwina have been married for years and family relationships are excellent.
The farm is owned by a company called Edgware Holdings, which it acquired in the 1970s, and in which Edgar is the 100% shareholder. For some years the property has been operated by a partnership between Edgar, Edwina and Eddie.
Good, you say. Not only is the transfer free of capital gains tax, because it was acquired before 1985 when CGT came in, but also because there is an intergenerational stamp duty exemption for farmers.
You explain that under section 274 of the Duties Act there are three applicable requirements.
• First that Edgar must have owned more than 25% of the shares for more than 3 years;
• Second that the farm business must before the transfer have been carried on by Edwina and Eddie “whether alone or with others”; and
• Third that the business must continue to be carried on by Eddie and Edwina.
All of which are so.
Edgar, Edwina and Eddie are duly impressed so the transaction is documented and finalised.
Later yet, you receive a call from Fred who says he is a friend of Edgar who was most impressed with the advice you gave him on the farm transfer and that he has a matter he would like you to fix.
Fred explains that he’s been running a bookshop for years and is fed up with competing with the big bookshops and their endless discounting. Fred wants to quit and give his stock of books to his daughter Fran who with her husband Frank has a thriving boutique bookshop in a country town.
You say no problem and that nothing is needed except a short deed of gift and that because the books are not “dutiable property” under section 11 of the Duties Act, the deed is exempt from duty. Frank says fine so the gift is documented and finalised.
The first call is from Daniel, who says he is David and Debbie’s accountant. Daniel explains the ATO’s view under TD 92/148 that by the partition David was taken to have disposed of his half share in the property taken by Debbie in exchange for Debbie’s half share in the property taken by him, and vice versa. David is therefore liable for CGT on half the increase in value of Debbie’s building since 1990, and vice versa. Lucky they weren’t registered for GST, Daniel says.
Why oh why, Daniel says, didn’t you talk to me first?
The second call is from Elise, who says she is Edwina and Eddie’s accountant. Elise explains that under Division 7A of the Income Tax Assessment Act 1936 – in section 109C – a gift of property by a private company to an associate of a shareholder is taken to be a taxable dividend equal to the market value of the property. Eddie and Edwina’s assessable income will therefore each include half the value of the farm transferred to them by Edgeware Holdings.
Why oh why, Elise says, didn’t you talk to me first?
Finally comes a call from Francis who says he is Fred’s accountant. Francis explains that under section 72-10 of the A New Tax System (Goods and Services Tax) Act 1999, because Fred is registered for GST and gave the books to “associates” he is liable for GST on the market value of them. And Fran and Frank are both “associates” of Fred – Fran as his daughter and Frank as his son-in-law. And further, Francis says, under section 70-90 of Income Tax Assessment Act 1997, because the books have been disposed of outside the ordinary course of business, Fred’s accessable income will include the market value of the books.
Why oh why, Francis says, didn’t you talk to me first?
1. GST and tax are governed by federal legislation; stamp duty by the states.
2. Freedom from stamp duty does not necessarily mean freedom from tax or GST.
3. Always involve your client’s accountant about business and property transactions.
By Jim Main
This article is general information only and should not be relied on without obtaining further specific information.