Land tax and foreign beneficiaries

It’s getting on for Christmas and you’ve had a hell of a rush – people seem to think the world will come to the end on Christmas Eve.

A month or so ago Mary asked you to set up a discretionary trust to purchase a residential property as an investment, which you did using your standard precedent.

You explained to her that having the property in a discretionary trust meant no threshold for land tax – meaning 1.6% on the full land value, but Mary had her reasons so it was all OK.

But then you watched a webinar and realised there would be an extra 4% if Mary’s trust deed did not specifically exclude foreign beneficiaries.

OMG! You think – I’ll have to get onto itwhen I’m back to work in January although – after all – I’ll have till 30 June to fix it.

No, no, no! The cut-off date for Land Tax is 31 December. Unless the clause is in before that date the 4% surcharge will apply for the coming year.

Selling the deceased’s home

When Eric died his family stuffed around for the best part of two years before deciding to sell. The market was hot and the value had increased a lot since his death.

The family ask you what about the fact that it was Eric’s home – does that mean the sale will be exempt? You say yes, provided it is sold within two years of death the main residence exemption applies – and for CGT it is the date of the contract that counts.

No, no, no! For the exemption to apply Eric’s estate must cease to have any equitable interest in the house at all (section 118-195 ITAA 1997), so the sale must be settled within the two year period). Under certain circumstance an extension can apply but stuffing around in making a decision is not on the list.

Selling a business asset

Helen tragically died a week or so after her retirement and just before she put in place her plan to sell the business office she acquired in the 1990s, which her accountant said qualified for the small business CGT exemption.

The family ask what you what to do and after consulting Helen’s accountant you tell them that, under section 152-80 ITAA 1997, provided the office is sold within two years of death the exemption that would have applied just before Helen died will still apply.

The family went away satisfied and you heard nothing more for almost two years when the family came back to say they wanted to sell but would keep the building as an investment if they missed the exemption.

They had a potential buyer ready to sign up but then you suddenly realised the two years were up in a week or so and that the possibility of finalising the sale in time was remote – so perhaps they should keep the old office.

No,no,no! Section 152-80 just requires that the CGT event happens within 2 years of death. CGT event A1 happens when a property is sold and section 104-10(3) states it is the date of the contract that sets the date – so all you have to do is exchange this week and all is sweet!

Company stuff

Last week you finalised a complex transaction by which Eliza’s family company settled the sale of one property simultaneously with the purchase of another property by her son Fred. Eliza was the sole director and shareholder of the company and Fred was buying his first house.

A few days after settlement, in the middle of a training session about it all, one of the youngies asked if the Division 7A agreement was signed before settlement. Having no idea what she meant you said of course but when you later asked an accountant mate over a beer if he knew what Division 7A was all about he said it was dangerous territory because payments by a company to a shareholder’s relative could be taxed as a dividend!

Back in the office, in a state of extreme mental distress, you called Eliza’s accountant to find out more and when he explained you said – that’s it! I’m in disgrace – my career is over!

The accountant said chill out! – it’s ok! – all we have to do is have a loan agreement in place before the company’s tax return lodgement date (section 109N ITAA 1936) – which isn’t until next May.


Takeaway points

  • Dates are tricky
  • What applies in one situation doesn’t necessarily apply in another
  • If it’s tax related – talk to the accountant!