Tax Q&A: Transferring land titles into trusts

Got tax queries regarding your property investments and wealth creation strategies?

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Q: My brother and I inherited a property in Melbourne after our father passed away in 2016. I would like to explore the option of transferring the title into two trusts – a family trust for my share, and a special disability trust for my brother. Would stamp duty be payable, as my father’s will did not mention trust accounts? Also, if I turned it into an investment property, it would be positively geared as there is no debt on the property. I am not sure if this is the most sensible path forward. Should we just consider selling it (even though the cash isn’t really needed) to minimise future tax complications?

A: I am sorry to hear that your father passed away.

Given that the property was transferred to you and your brother jointly in 2016 under your father’s will, for CGT purposes you are deemed to have acquired your ownership interests in the property at your father’s original cost base on his date of death. Assuming the property was your father’s main residence and was not used for income-producing purposes at that time, any capital gain or loss incurred on the transfer of your ownership interests in the property to the trusts within two years from your father’s date of death will be disregarded.

However, if you transfer ownership after two years from the date of your father’s death, you will effectively be taxed on the whole capital gain accrued from the date your father bought the property to the date you transfer it to the trusts. You will be eligible for the 50% CGT discount. If the property was your father’s main residence, the capital gain will be apportioned to exclude the period during which the property was covered by the main residence exemption.

If you and your brother transfer your ownership interests in the property to the trusts for no consideration, or for an amount that is less than the market value of the property, the ‘market value substitution rule’ will apply. 

"There is no stamp duty exemption available in Victoria for a transfer from an individual to a family discretionary trust"

This means you will be treated as though you have sold your ownership interests in the property at market value.

In Victoria, a stamp duty exemption is available for a transfer of dutiable property to the trustee of a special disability trust, provided that certain conditions are met. To be eligible, the transfer must be from an immediate family member of the beneficiary of the special disability trust; there must be no consideration provided for the transfer; and the dutiable value of the property must not exceed $500,000.  

Given the potential complexity of these rules, it may be advisable to obtain further specific legal advice, particularly in respect of whether the transfer is from an ‘immediate family member’ of the beneficiary of the special disability trust. For example, if the beneficiary of the special disability trust is your brother’s child, then the requirement that the property must be transferred from an immediate family member of the beneficiary may not be satisfied.   

Note that there is no stamp duty exemption available in Victoria for a transfer from an individual to a family discretionary trust. Accordingly, the transfer of the other half of the property to the family trust is likely to be subject to full stamp duty in Victoria.   

As for the benefits of leveraging the property as an investment, this will depend on your specific circumstances, and you will need a licensed financial planner to help determine how the arrangement would fit into your wealth creation plan. 

Eddie Chung

is a tax and advisory partner at BDO