Third time lucky for holders of property in a company, CC or trust
Those taxpayers who have not taken advantage of the Receiver of Revenue’s window period in which to transfer their primary residence out of a company, close corporation (CC) or trust without tax or penalty have been granted another opportunity in the Taxation Laws Amendment Bill 2010, which was released by Treasury at the end of August. However, there are a number of changes to the original proposals.
Historically, some individuals acquired their residence in a company, CC or trust, primarily to avoid transfer duty. Since the introduction of capital gains tax (CGT) and transfer duty on the disposal of shares in residential property companies, members’ interests in CC’s and beneficial interests in trusts, the advantages of these residential property holding entities have to a large extent diminished, coupled with the fact that the primary residence exclusion from CGT is only available to natural persons.
During 2002, there was a two- year window period and in 2009 a restored window period, whereby relief was granted to taxpayers to encourage them to transfer their residential properties out of companies, CC’s or trusts with no CGT, transfer duty or secondary tax on companies (STC) consequences.
The Taxation Laws Amendment Bill 2010 proposes to extend this roll-over relief to the end of 2012 as long as the qualifying criteria are met. It is within these criteria, applicable from October 2010 that the changes have been made.
The company, CC or trust must dispose of the property in anticipation of or in the course of de-registration, liquidation, winding-up or in the case of a trust its revocation. The Company or trust must take steps to liquidate or wind up within six months after the disposal of the property. This requirement was in part introduced to reduce the number of ‘unnecessary’ registered companies.
The property should have been used by the individual shareholder, their relatives or relatives connected to a trust during the window period – 11 February 2009 to the date of disposal – as their primary residences.
The residence must represent at least 90% of the value of the company/CC/trust. Therefore investment properties will not qualify for the relief under these provisions.
If the disposal qualifies for relief, the company, CC or trust will not be liable for CGT or STC (in the case of a company) transfer duty or the new dividends tax when introduced. Likewise the shareholder will not be liable for CGT on the surrender (disposal) of the shares.
Upon completion of the transfer the base cost of the residence to the transferees will be the same as that held by the company, CC or trust.
The roll-over relief will be extended to situations where, for example, a company distributes the property to a Shareholder Trust, provided the trust then distributes the property to a natural person beneficiary who used the property as a primary residence.
The practical effect of the proposed legislation can be illustrated by the example below drawn from the Bill’s explanatory memorandum.
Facts: A couple is a potential beneficiary in a discretionary trust. The trust holds all the shares in a company. In 1998, the company purchased a house which is occupied by children of the couple. On 16 January 2011, the company liquidates and transfers the house to the trust. The trust transfers the house to the couple on 1 March 2011. On 2 April 2011 the couple makes an application to the court for revocation of the trust.
Result: The transfer of the house from the company to the trust qualifies for the proposed relief. Similarly, the transfer of the house from the trust to the couple qualifies for the relief.
With the extensive changes to the Companies Act it is advisable that individuals who still have their primary residence in a company, CC or trust take advantage of the extension of the roll-over relief. However, before such decision is made, one needs to look at the effect such transfer may have on the existing estate plan, in particular that such transfer will not result in an estate duty liability for the individual transferee.
All material subject to our Legal Disclaimers.