Family Home owned in a Discretionary trust, tax consequences.

Question

Hi Bantacs,

We have recently purchased our new home that we (me,my wife & 2 daughters)live in on the Gold Coast, in a Discretionary trust with a corporate trustee.
I have been told I can get a long dated lease to offset Capital Gains tax on the sale of the home.
It works something along the lines of buying back the lease for the same amount of capital appreciation of the home. When it comes time to sell down the track. Is this correct?

I have been told I can also negatively gear the property as long as we pay market value rent(on paper). But I can not do both at the same time. It is either one or the other.
Have I got this correct?

Thank you, look forward to your reply.
Darren.

Answer

That is an interesting arrangement. The sale of a long term lease can qualify for the main residence exemption so I can see how it could be used to effectively hold a property in a trust and still utilize the main residence exemption. But there are still a few other issues that go with it. What you are trying to achieve is the trust increasing its cost base by the amount it has to pay you to buy the lease back. Remember it would have already reduced that cost base by the amount you originally paid for the lease rights. CGT will deem the transactions to have taken place at market value. I would think that it would be difficult to justify such an increase in the market value of the lease when it will be for a shorter period of time. Sure the increase in the market value of the property will increase the value of a right to live there but as the right to live there (assuming the rent doesn’t increase with the market value anyway) is now for a shorter period of time I can’t see how that market value increase could be as much as the capital growth in the property.

As for negatively gearing the property when it is rented to you, the ATO considers the property expenses in these circumstances to be private in nature so not tax deductible to the trust.

I assume the reason they are saying you can only do one or the other is because there are rules about having to charge market rent before you can negatively gear a property that is not rented at arms length and their plan is that the rent will move below market value during the period of the long term lease to give the appearance that it is of some value.

My advice is to not hold your main residence in a trust so if you decide to go ahead please make sure you get a ruling from the ATO and make sure that their answer also considers Part IVA

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