Trust transfer benefits
Question from dinesh updated on 12th October 2020:
I have three houses: one owner-occupied and two rentals. One of the rentals is in a LTC and the other is jointly owned. Both rentals are positively geared. I now wish to transfer all the houses to a Trust to take advantage of such things as tax benefits, asset protection and rest home subsidy.
I purchased both rental properties (nearly new) in 2015-2016, so they do not attract any tax on the capital gain, which is around $400,000. But depreciation recovery is a concern. Is it possible to avoid depreciation recovery - if I take the depreciated value of chattels as an initial value once transferred to Trust?
I got a valuation of the chattels for both rentals at the time of purchase. The original price of chattel is $70,000 and $62,000 for the LTC and the joint rental respectively. But the opening values, as at 31st March 2020, are now $40,000 and $35,000.
Also, I am not sure about the rest home subsidy if we have to move into a rest home? (I am 61 years old and earning $80,000; my wife is 62 years and making $36,000.)
Our expert Mark Withers responded:
The transfer to the Trust occurs at market value, and that applies to the chattels as well. If the market value of the chattels is book value or below there won't be any recovery of that depreciation. You will need to retain some evidence of how you have determined their market value though.
One thing to consider now with a transfer to the Trust is the brightline test. Movements between associated entities are not exempt from brightline so the Trust would need to hold the rental properties for five years to ensure there is no income tax on the gains that accrue to it. That’s because the brightline is re-set when you transfer the properties to the Trust.
Be careful also with your expectations around the rest home subsidy. Eligibility for this is set out in the Social Security Act and has means testing and income testing. Section 147A provides that where a person has deprived himself of income or property the person can be assessed as if the deprivation had not occurred. Deprivation includes gifts of $6,000 per year in the five-year period before application for the subsidy and gifts exceeding $27,000 in any 12-month period prior to the five-year period.
So making a lump sum gift of your properties to your Trust will generally guarantee you don't qualify for the rest-home subsidy rather than the opposite. Remember, when the government repealed gift duty they did not budget for any increase in rest-home subsidies. This is why.
Mark Withers and his team at Withers Tsang & Co specialise in advising on property related transactions, valuation and restructure services and tax planning.
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