Major concessions for properties trapped in trusts and companies

Current tax law provides for a concession for the transfer of a residence from a company, close corporation or trust to an individual without incurring tax liabilities such as Secondary Tax on Companies (STC), Capital Gains Tax (CGT) and Transfer Duty. The concession was intended to run until 31 December 2011 but will now be replaced by a new dispensation from the end of this month

Although there are changes, taxpayers should welcome the new concession as it provides far greater flexibility, says Dylan Buttrick, tax specialist at Mazars.

Previously, an individual (or in conjunction with their spouse) had to directly hold all the shares in the company that was transferring the property. Alternatively they must have donated or financed the acquisition of the residence held by a trust.

The taxpayer must have personally and ordinarily resided in the residence being transferred. “This legal jargon effectively resulted in the requirement that property being transferred must be the primary residence of the individual concerned,” says Buttrick.

In practice, the unnecessary restrictions of the old regime were quickly identified. For example, where a family trust owned a company, which in turn held the residence, the individual would not be able to make use of this tax concession as it was required that he or she hold the shares directly in the company.

“This was counter-intuitive to government’s objective of removing unnecessary entities from the company register, and the simplification of administration and enforcement,” Buttrick says.

Now, the new rules apply to residents that are ‘connected persons’ in relation to the company or trust. “In our view this change in wording will facilitate the transfer of a residence in instances where a family trust holds the shares in the company that in turns holds the property. It provides a far greater application than the previous regime.”

An important difference is the reference to a residence that is mainly used for ‘domestic purposes’. In other words, the residence being transferred no longer has to be the taxpayer’s primary residence. The words ‘domestic purposes’ will allow, for example a holiday home (provided that it is not rented out more than 50% of the time) to be transferred to the individual.

“Under the old regime many of our clients were frustrated that the legislation didn’t permit them to transfer their holiday homes. This change is undoubtedly a response to such criticisms.”

Buttrick says it must be emphasised that in order to achieve the objective of cleaning up the company register, this new relief requires the company transferring the property to be liquidated or deregistered within 6 months.

Similarly in the case of a trust, the revocation of that trust must occur within 6 months. This revocation will require written agreement between the founder, trustees and beneficiaries. Alternatively, an application for revocation must be made to a court. The latter instance would for example occur where the founder is already deceased.

There are additional technical changes included in the new relief which provide for a variety of distinctions such as where 90% of the market value of the company transferring the property is attributable to that particular residence, and instances where they are not.

However, says Buttrick, the overall effect of the concession is that any taxpayers who have not yet taken advantage of the current concession, have now been provided with a new and far more flexible relief against the ordinarily associated consequences of STC, CGT and Transfer Duty.