Tax Tip 100: Transfers between Spouses and CGT

There seems to be a general misunderstanding out there with investors about what happens if a spouse transfers an interest in a property to their partner spouse.

Most people don't realise that the transfer will be a CGT event. There is no exemption except on the break down of a relationship.

Example

Isaiah and his gay spouse Mohammed own a block of land jointly as tenants in common in 50 50 shares.

Isaiah wants to transfer his share of the property to Mohammed for no consideration (i.e. a gift). This is a CGT event because it is a change in legal ownership of the land. It will be assessed at market value too.

Going forward Mohammed will have 2 separate interest in the property for CGT purposes, each with different cost bases. He will have the first 50% interest and the second 50% interest (it is as if he has 2 separate properties).

Example
Land was purchased for $500,000 with $20,000 in costs and anotehr $30,000 in costs since holding. It is now worth $1mil. They each have a 50% interest so Isaiah's share is worth $500,000. Isaiah's cost base is $275,000 (half of $550,000) and the market value is $500,000 so that is a capital gain of $225,000.

Going forward Mohammed has 2 interests in the land:
A which he purchased for $250,000 and
B which he purchased for $1mil.

When Mo sells he will have to work out the cost base on each of these interests.

 

A very modern explanation with a gay, dual religion family to boot.

 

Assuming the property is PPoR (and not IP block) before and after the transfer. What is the CGT implication when:

• Isaiah transfer's his share of PPoR assuming he has jointly held the property for more than a year
  
• Mohammed eventually sells the PPoR, assuing he is sole owner for more than a year after the transfer was done.

 

Main residence exemption would apply.

If Isaiah lived in the house since purchase, it was under 2 hectares, not income producing etc then he won't pay CGT.

If Mo had lived there from the beginning and from the purchase of the 2nd share he should be exempt on both portions.

 

Thanks a lot. As always your advice is much appreciated.

 

@Terry_w , extending the above example with CGT 6 year rule and 2nd PPOR...

spouse A & B lives in PPOR1 from last 5 years. PPOR1 in spouse A name only. spouse A transfers the property in spouse B name. spouse B is the owner of the PPOR1 now and both spouse A & B stays in PPOR1 for another 6 months before they buy
PPOR2 (both on loan, only spouse A on title) and move in straight away. PPOR1 becomes IP in spouse when they move to PPOR2....

So spouse B owned the PPOR1 for 6 months before moving into PPOR2...

1) <6 years after moving in spouse B decides to sell IP (formerly PPOR1). can spouse B avoid paying CGT using 6 yr exemption rule? spouse B is ok to waive claiming same <6 years CGT exemption from PPOR2...
2) assuming PPOR1 is in VIC...so spouse A claims main residence exemption when transferring to spouse B and no stamp duty being in vic...correct?

 

1. yes possibly
2. in vic the last time I looked there was no duty on any transfers between spouses.
Tax Tip 103: Transfers Between Spouses and Stamp Duty in VICTORIA Tax Tip 103: Transfers Between Spouses and Stamp Duty in VICTORIA

 

Would it be cheaper to divorce the wife, transfer ownership to her via family courts (CGT Free), then get remarried after an appropriate time? Of course this was never staged/planned to avoid CGT. It's just that we reconciled at a latter date... Terrible plan, she would never be foolish enough to let me put the ring on her finger a second time... =(

 

Hi Terry can I ask about the costs/taxes of my own situation.

My wife and I are 50/50 on our first PPOR which we moved out of 2013 and is now IP1.

This is using 6 year rule as we haven't purchased another PPOR just more IP's and we choose to rent.

I have hit my serviceability limit and I am the higher tax payer. She runs a small business and I am PAYG.
If I spousal transfer to her name, I believe we will pay less income taxes (it is positive cash flow, we offset this property about 40% LVR) and also increase both of our Borrowing capacities/serviceability when the time to borrow again comes.

Will I be subject to pay CGT or just conveyancing fees?
Anything I'm missing here?

 

You are disposing of 50% so this is a cgt event. But you might be able to use the main residence exemption and 6 year rule to make the transfer exempt.

You need to consider the stamp duty costs too.

 

Thanks I had not considered stamp duty, may not be worthwhile for us.

 

There may be little to no stamp duty depending where the property is. If Vic act quickly

 

Unfortunately not, it's in NSW

 

In NSW the only exemption, other than divorce or death, is when going from one name to 2 names as equal owners and it is the main residence at the time.

 

s104B does contain a few issues and does need legal advice...2 year defacto rule and the issue of a resi property used partly for business or income.

One issue Terry - Can you explain (general guidance rather than advice I accept) NSW Duties Act s104B(3) ?

There are (were ?) other exemptions - Often quite rare I will admit
Stamp duty exemptions and concessions on property purchases in NSW - Tax - Australia

 

That is an interesting subsection Paul:

"(3) Land may be the subject of an exemption under this section even if it is partly held by another person who is not a part of the married couple or one of the de facto partners."

I take it to mean that A, B and C could own land with A and B being married/defacto. If ABC transfer it to AB the exemption could apply as long as its A and B's main residence and they end up equal owners.

But I have never tested this out and wouldn't try it without a private ruling.

 

I like the "may be" part. Agree that is certainly reason for a ruling.

So lets say Mum is a co-owner to assist her adult child and her partner to buy a home. Mum could go off title and no duty. I then question if her interest is as a trustee - No CGT ? If so it could be a strategy for parents to assist kids.....? Also raises questions about TIC and % and also joint tenancy etc.

It raises a number of questions. Love to hear from anyone who has a working knowledge of s104B(3) of the NSW Duties Act...When may OSR allow it ?

 

I don't think s104B would apply to trustees, that would come under a different section such as 104ZN
DUTIES ACT 1997 - SECT 104ZN Exemption for property passing to beneficiaries

 

I understood there is also an exemption for assets held since before 1985?

 

Yes. These are worth keeping as is in many cases as any transfer will then be subject to cgt