Transfer of protperty between spouses for financial reasons

Question

My wife & I have 2 negatively-geared properties in joint names. We are listed as joint tenants which means 50& share each.

She ceased working as of 20Jun14, & so her share of the tax loss is wasted as she can no longer offset & get PAYG back from 14/15 onwards.

Her tax refund was critical to assist with the escalating costs of properties especially, major repairs. I’m still working & will continue to do so for the next 8 years until I’m able to claim an Age pension.

As she can no longer leverage her share of the loss, we want to transfer both fully into my name, so that I can claim the entire loss as I’m now the sole breadwinner. There’ll be no funds changing hands, just ownership.

Can you pls advise what’s involved & what costs we may incur?

Many thanks
By: Kym on Nov 20, 2014 4:00AM

Answer


Kym,

I can’t tell you the likely stamp duty as it varies between states, depends on the value of the property and some states have concessions for transfers between spouses though your wife may have to continue to hold 1%.

Regardless of whether money changes hands it will still be considered a capital gains tax event at market value so if the properties have gone up in value there will be an unnecessary tax cost.

It is quite possible that the stamp duty and CGT will exceed the tax benefit you will gain over the next 8 years and after that you may regret having them both all in your name for tax purposes. If it is your intention to sell the properties when you retire then the CGT your wife would pay now to transfer the properties to you is not really wasted because the transaction will increase your cost base to make value on that half of each of the properties so she would just be paying some of the CGT now that you would otherwise pay in 8 years time anyway. Nevertheless, when you do sell you are going to wish they were still in joint names.

There is also the fact that your only reason for transferring the property from your wife to yourself is to improve the tax position for the family. This is technically a scheme with the dominant purpose of a tax benefit so could be caught by Part IVA. In these circumstances I recommend that people who do have another reason for doing this such as to resolve a dispute because one spouse wants to sell the property and the other wants to keep it, apply to the ATO to make sure they agree that is the dominant reason, before you go to the cost of transfer. It would be worth quoting this ruling http://law.ato.gov.au/atolaw/view.htm?docid=AID/AID200179/00001
Now be careful how you finance the purchase off your wife. It is not sufficient to just take over the loan repayments. The ATO can argue that you only used half of the loan to buy your interest in the property, the other half was used by your wife to buy the property and is no longer deductible because she no longer owns that half of the property. You need to borrow a fresh to buy her share and then she can use those proceeds to pay off her share of the other loan. TR 2000/2 should allow her to pay the amount into the loan from the sale of her share and have it considered to have only paid off the portion of the loan that was used to purchase the property that was sold, ie your wife’s share of the property.

I am wondering that if you are only 8 years off retirement whether you have some spare cash available or maybe your wife has some superannuation she qualifies to access tax free. Now you would have to do the numbers on the opportunity cost and get a ruling from the ATO about the strategy but I am thinking about paying out your wife’s share of the loan so that her deductions aren’t wasted. This is not as good as shifting the deductions to you but if you have spare cash better to stop paying the bank that interest anyway. I just don’t know enough about your circumstances to be able to tell you if this gives you a good outcome financially so please take it up with your accountant. The reason I suggest you get an ATO ruling is because you just can’t go and pay off half the loan and say the other half is yours (Domjan’s case 2004). And there is plenty of ATO material saying that all expenses must be split on the basis of ownership on the title deed. But I have successfully argued with them that this cannot be the case when it comes to interest because, if say I owned a property with my brother and he borrowed to buy his share and I didn’t borrow for mine, I cannot claim half the interest he paid. So if you are interested in the approach I suggest you change the property from joint tenants to tenants in common 50:50 this will cost you nothing with the stamp duties office and nothing for CGT. Then refinance the loan into two separate loans one only in your name and the other only in your wife’s name. The bank will no doubt want you to guarantee each other’s loan but that is ok. Then pay out your wife’s loan preferably with money that is in her name.

In short no matter which way you go you should get a ruling from the ATO first. And the best approach depends on the numbers.

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