Traps when buying an investment property in a family trust can be:
- Land Tax;
- Foreign owner surcharge tax;
- Surcharge purchase duty;
- Expense to transfer investment property out of the trust;
- Unable to gift the investment property in your Will.
The individual/s or entity to use when buying an investment property is an important decision.
Partners (married or defacto) can buy property:
- in both names as joint tenants (the survivor automatically inherits the deceased’s partners share) or tenants in common (where property does not automatically pass to the survivor but in accordance with the deceased partner’s Will);
- by one partner only – often for asset protection;
- by a family trust, a company, a unit trust or a SMSF.
This article focuses on buying NSW residential property in a family trust and the potential traps and issues.
- Buying property in family trusts has been a popular way to invest for years.
- Family trusts are commonly discretionary trusts for the benefit of a family group, controlled by the parents as trustees – either themselves or as directors of a corporate trustee.
- The family group is usually parents and their children, with spouses and other family members also able to benefit.
- Family trusts can last up to 80 years or a shorter time determined by the Trustee but this always depends on the terms of the Trust deed.
- A benefit of family trusts is that income generated from trust assets eg rent from real estate can be distributed to family members with a lower tax rate and so less tax is paid.
- A family trust can provide protection to assets from marriage breakdowns, claims on an estate of a deceased beneficiary and bankruptcy. The level of protection depends on how the trust deed is structured.
Traps in NSW
Yearly payment – land tax
is payable on the unimproved value (land value) of NSW property (buildings – residential, commercial and industrial – and units) owned by family trusts. Individuals and companies benefit from a land tax free threshold and are not liable to pay land tax on land valued at up to $755,000 (for 2021). Family trusts do not benefit from the threshold.
Yearly payment – Surcharge land tax (SLT)
applies to foreign persons who are owners of residential land in NSW. Family trusts can be liable to pay this surcharge if the trust deed has not been amended to exclude foreign persons as beneficiaries. This is regardless of a foreign beneficiary in the trust or not.
A family trust deed MUST be reviewed to ensure it has been drafted or amended correctly to avoid the SLT.
The SLT is 2% of the value of the land, in addition to existing land tax. For example, land valued at $400,000 will be liable to yearly land tax of $6,398.40 plus the yearly SLT of $8,000.
An Australian citizen is not a foreign person for the purpose of this tax regardless of whether they live in Australia or not.
Once only payment – surcharge purchase duty (SPD)
applies to purchases of NSW residential land by a foreign person. The SPD will be payable in addition to stamp duty unless the family trust deed excludes foreign persons as beneficiaries.
SPD is 8% of the value of the land. For example, a family trust purchases a NSW residential property for $1M and there is no exclusion of foreign persons in the trust’s deed. SDT of $80,000 is payable by the family trust in addition to stamp duty of $40,335.
A solicitor who is experienced in this area is best placed to review a family trust deed.
If a foreign person is a beneficiary, the surcharges will be payable. A foreign person is defined by legislation.
Expense to transfer property out of the trust
If the family member/s who control the family trust wish to transfer the property from the trust to say, an adult child, stamp duty and capital gains tax (if the property has increased in value) will be payable. With care CGT may be reduced by 50% if the property has been owned by the trust for more than 12 months and it can be distributed to the beneficiary rather than transferred. Legal advice is required to ensure it is done properly.
When parents who control the trust get older
they cannot leave the property owned by a family trust to their children in their Wills. A family trust is a separate legal entity.
What can be done is to fix the future control of the trust for the next generation. Careful estate planning can achieve a smooth transition of control of the trust to adult children.