Keeping it in the Family: Tax Tips for Property Transfers Between Family
KEEPING IT IN THE FAMILY: TAX TIPS FOR PROPERTY TRANSFERS BETWEEN FAMILY
Buying property is a costly endeavor, and it is thus common for family members to help. However, over time, needs and wants change. Property is transferred, sold or otherwise dealt with. If not handled properly, such transactions risk triggering significant tax ramifications, and lumbering these on unsuspecting persons.
So what are some prudent tax tips? First, you need to understand what tax is. According the Lexis Nexis Concise Australian Dictionary, taxation is “A compulsory exaction of money by a government for public purposes, being neither a pecuniary penalty nor a fee for services rendered.” Importantly, tax is not a punishment, nor a service fee, nor is it optional. You should therefore never approach property transactions with a mindset that tax can handled later, or that your accountant can think of some way to avoid it. Tax should be at the forefront of any consideration given towards property transactions.
Okay, so with that rant on civic responsibilities finished, what are some tax tips?
Tax is assessed at the time the transaction is brought before the relevant taxation office, and not at the time money changes hands: This is relevant for property transactions where a family member sells a property to their relative, but the transaction is only brought to the attention of the tax office years later for the purposes of correcting title. You cannot delay notifying the tax office in the hopes of paying the old tax assessment. Indeed, doing so risks having tax assessed at a higher sum.
Clever arrangements can leave tax on other parties: It may be tempting to move property through a clever scheme to avoid tax. Take for example this situation. Child 1 sells a property to their Parents but does not change the title. Instead, the Parents leave the property to Child 2 via their Will, hoping that following their death, the property will pass tax free. Unfortunately, this will not work. If Child 2 tries to use the property following the Parents’ death, the titles office will first require Child 1 to pay tax on the original sale, even if Child 2 has been using the Property since the Parents’ deaths. Clever tax arrangements tend to convolute the problem, and dump tax issues on unsuspecting parties.
Being related to somebody does not offer a universal exemption: Clients often wrongly believe that merely being related to somebody invokes a tax exemption for moving property. Some transfers, such as between spouses, are exempt. But transfers between cousins, siblings, or an aunt and niece, for example, are not.
Tax exemptions are specific and narrow: Tax legislation is not simple. Take for instance, section 43 of the Duties Act 2000 (Vic), which offers a stamp duty exemption for transfers between spouses. This seems straightforward, but several criteria apply:
The persons are spouses or domestic partners;
No other person obtains an interest in the property through the transfer;
There is no consideration (i.e. money changing hands) for the transfer;
The property is for residential purposes; and
The person who obtains ownership of the property must within twelve months reside there for a period of a year.
The above are not insurmountable but show that exemptions are often nuanced and technical. Therefore, always check the requirements before relying on an exemption.
Taxation law is an arms race between the tax office, and the taxpayer, with both constantly trying to gain an advantage over the other. This results in a voluminous, dynamic and labyrinthine legal landscape, which is difficult to navigate for the average person. However, if you remember the above tips, and apply a liberal dose of common sense and scepticism, you are well on your way to avoiding the pitfalls and traps arising from tax exemptions.
This article is intended only to provide a summary of the subject matter covered. It does not purport to be comprehensive or to render legal advice. No reader should act on the basis of any matter contained in this article without first obtaining specific professional advice.
DISCLAIMER: We accept no responsibility for any action taken after reading this article. It is intended as a guide only and is not a substitute for the expert legal advice you can get from De Marco Lawyers and other relevant experts.