Tax Q&A: Dissolving trusts and transfering property

Question: I bought a warehouse/office in the mixed-use zone of a Melbourne beachside suburb in 2004. It was purchased in a family trust structure with a corporate trustee. The trust only holds this one property and no other assets. The beneficiaries under the terms of the trust are myself and “any children of the nominated beneficiary” – that is, my 24-year-old son.

From the time of purchase until now, the property has been tenanted by various businesses with a commercial lease. I have remitted GST to the ATO throughout my ownership.

The current tenant is leaving in 2020, and I wish to convert the property to my PPOR and transfer it into my personal name so I do not have to pay land tax and may collect any future growth CGT-free from the date of transfer (around 2020).

Being a beneficiary and controller of the trust, am I able to dissolve the trust and transfer the property into my name without paying stamp duty, as the beneficial owner has not changed? Also, does this result in a CGT event that requires immediate payment of the CGT, or may I get a valuation at the time of transfer to my personal name and then pay the CGT when the property is sold to another party further down the track?

Mark

Answer: There are three potential taxing points in your proposed transaction.

The fi rst is CGT. If you sell a capital asset, such as real estate or shares, there will be a capital gain or loss that must be reported in the year of sale for tax to be paid in that tax return. The ATO can apply the market price even at zero consideration, so it is important to get either a valuation or a market appraisal showing comparable sales data to support the transaction.

The second is GST. If you sell commercial premises you’re generally liable for GST on the sale price. This means you pay GST of one-eleventh of the sale price and can claim allowable GST credits on your purchases related to the sale.

If your commercial property is being leased when you sell it, you may be able to treat your sale as the GST-free supply of a going concern. As you are registered for GST it will be critical to correctly review your GST registration, otherwise the transaction may trigger a GST liability.

The third is stamp duty. This is a state government charge, and every state has different rules. 

As a general rule in Victoria, the Duties Act allows land held in trust for a benefi ciary to be transferred to the beneficiary without payment of duty, provided it is clear the trust was established before the land was acquired and the duty was originally correctly paid. You will also need to show that you are a properly defined beneficiary; the transfer to the benefi ciary is absolute; and the trust has the ability to vest the whole or any part of the capital of the trust estate.

Without reading the trust deed or final documents I have assumed the above three points will be met.

Please note that the exemption does not apply if the transfer of the property to the beneficiary is the result of a sale or arrangement where consideration is provided, which is different to how CGT would be determined.

You will need to ensure correct treatment and timing of the transaction for CGT, GST and stamp duty minimisation. This will then determine how and when the trust is to be closed. You will also need to consider how any existing mortgage is to be dealt with.

Need to know: 

- If you sell a capital asset, the capital gain or loss needs to be reported

- You may need to review your GST registration to determine liability

- Victoria’s Duties Act allows land held in trust to be transferred to the benefi ciary without paying duty

Ken Raiss

is director at Metropole Wealth Advisory