Ask Ban Tacs Question
House A
This is the family home in NSW we are both currently living in and I am shortly to move out of in February.
My wife will live in this until separation settlement, and may continue to do so depending on whether we can make that work for her financially in the settlement.
My wife will (continue to) nominate this as her primary residence.
It has never been rented out.
I am on the title at 99%, my wife is on at 1%.
We are both on the mortgage.
We cannot take me off the mortgage prior to settlement as she cannot service it alone, but we are both happy to pay to change the title percentages though if it helps the CGT position later.
House B
This is a home in NSW I commenced purchase of last week and is now with conveyancer in early stages.
I will live in this home as soon as practical after purchase completes.
We are both on the mortgage as I could not borrow for it alone.
I intend to nominate this as my primary residence
My wife is determined to be on the title rather than a caveat as she has had advice that since she is on the mortgage, it is prudent. (potentially not from a CGT perspective though, I understand that, but this is how it is).
We have yet to determine the title percentages on this property, but need to do so this week I think.
Settlement
We wish to retain house A for at least 2 years until our daughter is 18, and preferably find a way for my wife to remain there after without selling it.
If we do settlement earlier than 2 years time, it is probable that settlement would force a sale of house A as I am unlikely to be able to raise the funds to buy my wife out of it fully for a few years.
CGT
My understanding is I would be accumulating CGT on house A from the moment I move out, and my wife would be accumulating CGT on house B from the moment we purchase it.
Question
I am asking from the perspective of both of us – i.e. what costs us jointly the least in tax, not from the perspective of one party, as ultimately it leaves more in the pot for us to divide.
a) Is it prudent from a CGT perspective to reverse the ownership percentages on house A to be 99% to my wife, 1% to myself, and nominate myself as 99% of house B and my wife at 1% so that we protect the maximum amount under primary residency? Or even make both 50:50?
b) I guess I have the same question on Land Tax too, but that is probably not your area, but feel free to advise if you can!
I don’t fully understand the ATO saying “If you nominate different homes for the period and you own 50% or less of the home you have nominated, you qualify for an exemption for your share” – thinking that maybe that implies there is no point going beyond 50:50 on either property. https://www.ato.gov.au/individuals/capital-gains-tax/property-and-capital-gains-tax/your-main-residence-(home)/living-separately-to-your-spouse-or-children/
Answer
That link to the ATO web site discusses when a couple are living in separate homes and how they can share their one main residence exemption. Notice how it refers to your spouse. Your ex wife is no longer your spouse as in your case you are permanently separated. This means you get one main residence exemption each but of course for your wife to be able to cover a property with her main residence exemption she would have to live there so that is out of the question for the new house. Really if she wants to take advice that 50% ownership is better than a caveat then that is her choice to accept the CGT. But if her 50% is transferred to you on marriage breakdown then it is your CGT liability. It just seems so silly to give the ATO a handout here, when it is not necessary.
Your idea of 99:1 on the new house with the 1% going to your wife would certainly be a better option then 50:50, at least the CGT would be minimal. If she is open to that then grab it. Likewise switching around to 99% to your wife on the current family home will also reduce CGT considerably once you move your main residence exemption to your new home. Just for completeness but not as a practical option I would like to point out that you can choose to continue to cover the current family home with your main residence exemption after you move out but that will expose your new home.
As it currently stands owning only 1% of a home that is covered by her main residence exemption is a waste. Your 99% can continue to be covered with your main residence exemption but only if you don’t cover the new property. While not exactly clear in legislation it is generally accepted that you can still only choose one house. Not say well I will put 99% of my main residence exemption on the family home and 1% on the new home besides it is hardly a solution. The problem is you owning 99% of your ex wife’s home.
It may only be in 2 year’s time that your ex wife decides that she does not want such a big house on her own and the sale of it will make the whole problem go away. Bearing this in mind it would be nice to get the marriage breakdown exemption on any stamp duty payable to get your ex wife’s 1% up to 100% or 99%.
Now you are saying that you are thinking of holding it all together until your daughter leaves school, I assume. I have seen divorce rollover be used to change ownership into 50:50 but this does not solve the whole problem. I am just pointing out that an option is to continue to own a property together as tenants in common yet be able to finalise your financial affairs.
The absolute best outcome is, to date the existing house is fully covered by your main residence exemption because you both have always lived there. Any transfer at this point in time would be CGT free. Once you move out you have a whole main residence exemption to cover this house that is about to settle. If each house becomes 100% owned by its respective occupant then happy days, no CGT. You are separated, one main residence exemption each. If divorce comes along later and the ownership ratio changes again then fine you are considered to have used the property the same way your ex spouse did so still all good. Surely, if your wife gets 100% of the existing home in return for allowing you to have 100% of the new house she will be happy, though I recommend both of you put a caveat on each other’s home. This transfer, of the existing home, now will not attract any CGT as it is your main residence. Stamp duty may be a problem unless you do this as part of a relationship breakdown agreement and the banks aren’t going to like that. I think the banks should be ok in the change of ownership ratio for “tax purposes” as long as they have security over both houses and a guarantee from the owner.
So let’s come back to the question of why do you want to divorce? I say sooner the better while it is amicable but you are saying your wife can’t stay in the existing home without you continuing to be her husband in the banks eyes. Maybe that is it in a nutshell. If divorce isn’t urgent then it would seem the timing could be driven by stamp duty considerations. There is a bit of a difference between permanently separated and finalising your affairs through a binding financial arrangement. When you think about it they probably never happen at the same time so let’s see if the solicitors think this can work for you.
Do you have to tell the bank there is a relationship breakdown? From what I have seen there is no need to completely go your separate ways financially to effect a relationship breakdown arrangement. It is just a matter of coming to an agreement about your financial affairs as a result of the breakdown. How would your solicitor feel about agreeing to the two separate properties being owned individually but the debt staying on foot with an agreement that maybe 80% of it is your ex wife’s liability in recognition of the more valuable asset and 20% yours. Of course the bank won’t recognise this, it would just be an arrangement binding on the two of you. The bank still has you jointly and severally and your solicitor is probably going to worry about that but it seems like you would pay the mortgage if necessary anyway rather than have your daughter homeless. Then an agreement that the debt has to be refinanced in a certain year ie when you think your ex wife probably doesn’t need that house anymore anyway or 2 years time etc. Basically, a business arrangement with an end date between two independent parties, like a brother and sister buying a house together. You tell the bank the arrangement is for tax purposes as you switch around ownership and then tell the stamp duty office and ATO it is on the basis of a relationship breakdown. Both of which are true because I would never recommend anyone lie to the authorities. Also you need a solicitor to tell you whether this is at all feasible, the banks may know the stamp duty divorce concession has been used, I don’t know. My focus is CGT and that is completely removed if we can get 100% individual ownership of each property before February. I am a bit one eyed about that. Divorced or not the bank’s position hasn’t changed they have got you both.
Regarding land tax. You are right, it is different in each state so I try to stay clear of it but obviously 100% individual ownership of your respective houses that you live in while permanently separated will mean no land tax.
So in direct answer to your question:
a) Is it prudent from a CGT perspective to reverse the ownership percentages on house A to be 99% to my wife, 1% to myself, and nominate myself as 99% of house B and my wife at 1% so that we protect the maximum amount under primary residency? Or even make both 50:50?
My preference is 100% each using divorce rollover to eliminate stamp duty but emphasising to the bank this is for tax purposes and the rest is none of their business. Failing this 99:1 with the 99 being the person who is living in the property but still if you are going to do this with the home A that is a lot of stamp duty (I think, ask your solicitor) unless you use the divorce concessions. Possibly more stamp duty than the CGT saved. Further if you use the divorce to go 99:1 instead of 100% you still have to untangle in 2 years time with CGT and stamp duty though at a much lower rate as only 1%. Still it is going back to the solicitors etc.
I think what I need to say here is that as discussed above going 50:50 will not allow you to cover both half of home A and half of home B with your main residence exemption even though you have lived in both and as your wife has only lived in one all that you are doing is slashing the benefit of her main residence exemption in half. Once you are living permanently separately you are entitled to a full main residence exemption each.
