Main residence mishaps: What happens when your main residence is owned by a company or trust?

The main residence exemption allows a capital gains tax (CGT) exemption on the sale of a person’s family home. The exemption requires an individual to have an ‘ownership interest’.

However, unfavourable tax consequences may arise where a taxpayer’s main residence is owned by a company or trust – rather than being directly owned by them as an individual.

What are the issues with a company or trust owning your main residence?

Ordinarily, if your family home is owned in a personal capacity, the following concessions may apply:

1. Land tax exemption – a land tax exemption for person's principal place of residence.‍‍
2. Main residence exemption – an exemption from CGT on the sale of the property.

Where legal title is registered to a company or trustee of a trust, the taxpayer may have put their land tax exemption and main residence exemption in jeopardy.
Problems regarding these ownership arrangements often come to light when a decision is made to sell the property or change the ownership structure of the property (i.e. from a company or trust to individual).

When does the issue arise?

In most circumstances, family homes are owned by individuals (not companies or trusts). However, there are a variety of reasons why legal title to a main residence is registered to a company or trustee.

In our experience, the most common reasons are as follows:

1. Historical – often for properties purchased in the late 1980s (shortly after the introduction of CGT).‍
2. Asset Protection – as a strategy to guard an individual’s wealth from risk of being personally sued.
3. Financial considerations – where the property was funded using the retained earnings of a company or at the insistence of a lender (bank).‍‍
4. Change of intention – where the property was originally purchased through the trust or company for reasons other than for use as a main residence (e.g. investment property).‍‍
5. Advice – where insufficient advice was provided regarding the taxation consequences of owning a main residence in a company or trust.

What are the tax issues and is there any tax relief?

A decision to sell or restructure is often heavily impacted by what tax might apply. If your family home is owned by a company or trust and you are planning to sell your property or restructure the ownership, the two main hurdles are transfer duty (stamp duty) and CGT.

Duty Exemptions

The starting point is that any transfer of property will be a dutiable transaction, resulting in duty being payable by the transferee (recipient). Duty is payable at the higher of consideration or market value, and at rates of up to 6.5% (Victoria) or 7% (New South Wales) of the unencumbered value of the property. This includes a restructure (e.g. a company transferring property to the owner of the company).

However, there are some exemptions which might apply:

1. Trust to Beneficiary – in Victoria, sections 36, 36A and 36B of the Duties Act 2000 (Vic) may allow a duty exemption on the transfer of property from a trust to a beneficiary. Whether an exemption is available will depend on the terms of the Trust Deed, the identity of the beneficiary, and the proposed transfer. In New South Wales, exemptions for transfers from trusts to beneficiaries are more limited.
2. ‍Apparent Purchaser – a duty exemption exists for the transfer of a property from an ‘apparent purchaser’ to the ‘real purchaser’. Where a property is registered in one person’s name, but someone else provided the money for the purchase of the property, this exemption may apply. In Victoria, this is provided by section 34 of the Duties Act 2000 (Vic). In New South Wales, this is provided by section 55 of the Duties Act 1997 (NSW).‍‍
3. Primary Production – a duty exemption generally exists for the transfer of land that is used for primary production from a company or trust to a related individual. In Victoria, this is provided by section 56 of the Duties Act 2000 (Vic). In New South Wales, this is provided by section 274 of the Duties Act 1997 (NSW).‍‍
4. Family Law Breakdown – a duty exemption generally exists for the transfer of land from a company or trust to a related individual, where the transfer is made solely because of the breakdown of a marriage or domestic relationship. In Victoria, this is provided by section 44 of the Duties Act 2000 (Vic). In New South Wales, this is provided by section 68 of the Duties Act 1997 (NSW).

Capital gains tax (CGT)

The starting point is that any transfer of property will result of a CGT event. A capital gain will arise if the capital proceeds (or market value) is more than its ‘cost base’.

This includes a restructure or on the sale of a main residence owned by a company or trust. However, there are some exemptions which might apply:

1. Trust Relationship (Absolute Entitlement) – where a person is ‘absolutely entitled’ to a property as against the person registered on title, the CGT provisions apply on the basis that the absolutely entitled person is the true owner of the property. This may allow that individual to claim the main residence CGT exemption. A purchase money resulting trust is one example of where this situation might arise (e.g. a company is registered on title, but all of the funds have been provided by an individual).‍‍
2. Small Business CGT concessions – where a property has been used (or was previously used) in a business carried on by a related party, it may be possible to the claim the small business CGT concessions on the transfer of that sale. The concessions may either dramatically reduce or even eliminate any capital gain.‍‍
3. Family Law Breakdown – Subdivision 126-A of the Income Tax Assessment Act 1997 (Cth) allows for a CGT rollover where a property is transferred due to a marriage or relationship breakdown. This includes a transfer from a trust or a company to an individual. Where a company is involved, complex issues arise on whether that transfer is a dividend due to the interaction between the Family Law Act 1975 (Cth), the CGT rollover and Division 7A.‍‍
4. Calculating Cost Base – where no rollover applies, it will be necessary to calculate the ‘cost base’ of the property. For main residences held by a company or trust, this can be a complex process as various annual costs such as insurance and rates may be able to be included. Appropriate documentation must also be kept.

Next Steps

The above duty and CGT exemptions are of some avenues that may be available where a main residence is owned by a company or trust. Each exemption requires the taxpayer to meet certain eligibility requirements and as such, it is important that you seek proper legal advice on the application of the above concessions or exemptions to your circumstances.

Overall, any situation where a taxpayer’s main residence is owned by a company or trust is complex and may result in unfavourable tax consequences. It is prudent to ensure that you seek legal advice if considering selling or restructuring a family home owned by a company or trust.

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This article in no way constitutes legal advice. It is general in nature and is the opinion of the author only. You should seek legal advice tailored to your individual circumstances before acting on anything related to this article.