Your home is your castle but beware of Land Tax!

Many of our clients are successful in business and reach a point where they want to lock away their family home to protect it from future creditor claims.
Creditor claims can arise at any time especially when a person has the duties and potential liability as a Company Director.
One way to ensure protection of this key asset is to transfer it for market value into a special purpose discretionary trust. The terms of the trust are such that the clients are listed as the “Appointors” or controllers of the trust and the Primary Beneficiaries. The “default beneficiaries “are the individuals that will receive the capital from the trust on winding up or “vesting” of the trust assets. The appointors get to choose the trustee of the trust which holds the discretion to distribute capital or income from the trust. If a person has claims against them they are entitled to resign as an “appointor” and a replacement or substitute appointor will be automatically be installed on the terms of the trust deed. This serves to protect the family home as an asset from creditors.
There is a major revenue issue with holding a family home in a family trust. Land Tax is payable if the property is above a set value each year unless an exemption is obtained.
The Land Tax Act 2010 (Qld) (‘the Act’) provides that land used as the home of a person for a financial year is exempt from land tax, provided that the land is comprised in one parcel and either owned by a person and used as the person’s home or owned by a trustee of a trust. This requires the home be used as the home of all default beneficiaries of the trust and it is not used for an income producing purpose.
The three tests for land used as the home as set out in section 36 of the Act include: –
a) that land, and no other land, has been continuously used by the person for residential purposes, whether alone or with another person, for the six month period (‘the main test’) or
b) the land is taken to be used as the person’s home under sections 37 or 38 (‘the deeming test’) or
c) otherwise – the Commissioner is satisfied that the land is used as the person’s principal place of residence, whether alone or with another person, when a liability for land tax arises for the financial year (‘the residual test’).
The deeming tests allow for the situation where an exemption is claimed despite the person not occupying the home during the six month residency period, due to illness or having to reside elsewhere for care (section 37) or where the person is unable to reside on the land due to renovations to the residence or the existing residence has been demolished and a new residence is being constructed on the land (section 38). The residual test allows for the Commissioner being satisfied that the land is used as the person’s principal place of residence as at 30 June despite not satisfying the six month residency period. Section 36(2) provides considerations the Commissioner may have regard to in deciding whether the residual test is satisfied and includes among other things factors such as the length of time the person has occupied a residence on the land and the person’s address on the electoral roll. Further, the Act allows for allowable lettings (see section 40(2) of the Act for the definition of allowable lettings) or a person to engage in work from home agreements with their employer.
For most situations an exemption will be able to be claimed to preserve the family home and ensure no Land Tax is payable.
Keep in mind that capital gains tax will be payable on any increase in the market value of the home which would otherwise be exempt as the main residence if held in individual names. The usual 50% discount rule will apply if held for 12 months from the date of transfer.
These are important considerations but generally these tests will be able to be met by clients seeking protection of the family home from future creditors, provided the claims are not within the relation back period under the Bankruptcy Act and there were no known circumstances that could give rise to a reasonable expectation of a claim against the person. If it is clear there were facts that demonstrate the transfer was solely to defeat or delay creditors then the transaction may be set aside. Market value paid for the transfer indicates that the transaction was reasonable and this is unlikely to be able to be reversed without compelling evidence of potential liability.
We note the terms of the trust deed for this special purpose must be drafted very carefully taking into account the class of beneficiaries and default beneficiaries. Call us if you need guidance, cheers Tony

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