Tax Tip 15: Transfers for No Consideration and Deductibility of Interest

Transfers for No Consideration and Deductibility of Interest


This is an obvious one, but people are still not realising the mistake.


Interest on a loan will generally only be deductible where the borrowed money is used to purchase an income producing asset.


I have come across several people who transfer property between themselves and their spouse, mainly for tax reasons, and who do this without consideration - i.e. as a gift.


If you receive a property as a gift you cannot claim any interest on a loan on that property.


E.g. Jack and Jill are spouses and Jack wants to increase his tax deductions on their negative geared property which they own jointly as tenants in common 50/50. The loan is for say $500,000 but the property is worth $1,000,000. Jack thinks he can transfer Jill’s share to himself and increase the loan to $800,000 and then claim all the interest.


He goes to a conveyancer who says a contract is not needed and all they need is a transfer. Consideration on the transfer is listed as Nil. Title changes to Jack’s name only. Bank is happy to change the loan to Jack’s name only too.


Jack starts claiming interest on $800,000 against his income. But he is audited by the ATO and finds out he cannot claim the extra interest because the loan does not relate to the purchase of the property - his new 50% share was a gift. In fact Jack can only claim interest on $250,000 of the loan because this is the amount relating to his initial 50% share.


Get both legal and tax advice before attempting any transfer of property or increasing of loans.

See this thread relating to trustee transfers without stamp duty where this issue can also arise:

Legal Tip 54: Stamp Duty Transferring a property from a trustee to a Beneficiary in WA https://propertychat.com.au/communi...y-from-a-trustee-to-a-beneficiary-in-wa.2684/

 

Hi Terry,

Great Post. Just wondering if you can further clarify on a few of my questions below:

1) So if Jill did transfer her 50% of share at the market value of $1Mil, then I guess the most of which Jack is entitled to claim interest on the homeloan, would be just that $750,000? (Jack's initial 50% at $250k & Jill's 50% at current revaluation of $500k)...Deductibility of the remaining $50k would be treated under the usual s8-1 of ITAA97 - i.e. the purpose for which the found would be used for? Am I right?

2) So I guess Jill in the example above mainly transferred the property without consideration for the sake of avoiding the stamp duty which would otherwise be payable on the transfer?

Thanks in advance of your comments.

 

1. Yep, that sound right.

2. Jill was just being silly. She tried to skimp on legal advice to save money but it cost her a fortune. Stamp duty varies from state to state - nil for market value transfers between spouses in some states.

 

Thanks for your share of knowledge! Truly appreciated.

 

Thanks for sharing your knowledge. Much appreciated.

 

So Victoria still has nil stamp duty transfers for PPOR transfers between spouses post 30 June 2017. Spouse and partner exemption | State Revenue Office.

However up until today (30 June 2017) the exemption from Victorianm stamp duty had no conditions. NOW the exemption only applies to PPOR and the property must be transferred for no consideration. Also at least one party to the relationship must live in the property as their PPR for a continuous period of at least 12 months commencing within 12 months of the transfer.

So if the property is transferred for no consideration for Victorian stamp duty purposes, what is the cost base for tax purposes (CGT etc). Do the market value substitution rules apply?

 

I haven't seen the new legislation for VIC yet, just looked it up but changes not reflected yet. If it has to be transferred for no consideration that is a bummer. It may work out better paying the stamp duty in these situations and transferring at market value so you can claim the interest on the loan.

For CGT the market value would apply

 

Yeah its far tougher now. The nil consideration closes a loophole sometimes. I still believe a cgt transfer occurs at 50% of market value since tge market value sub rule is triggered. I suspect somone will seek a tax ruling on the interst issue arising....its ambiguous as non cash consideration could still be a factor. If a spouse can gift property why not a debt? Eg what stops one spouse assuming their responsibility for a share of a debt?

 

Are you sure this is the case....from the guide i can find you still have option to select the consideration....check with your conveyancer....

https://www.propertyandlandtitles.vic.gov.au/forms-guides-and-fees/transfer-of-land Refer to 'Guide: Transferring property between spouses or domestic partners'

 

A debt can be assigned, but

I don't think this will work. Debts can be assigned but in this situation there will be a repayment of the loan and new borrowings.

Worth a try though.

 

What about if the stamp duty is applicable between spouses? Would that validate the fact the purchase is to achieve higher income than previous, thus making the loan required to acquire spouses share tax deductible?

 

I don't follow NG

 

Is there anyway to purchase a portion of my partner's ownership on an existing property whilst retaining the existing loan with the outcome of my partner placing these sale proceeds (of her share) into our non-deductible debt.

 

Yes. One spouse may own 50% based on historical cost (perhaps) and the other may own 50% based on market value at the date of transfer.

 

Yes. However 50% of the former loan loses its deductibility since the ownership interest has changed. Depending in which state (No = Vic) and some other matters it may be prudent to transfer for market value and resettle the loans.

The cost in Victoria to do this may be 50% duty.

 

I think I understand.

Stamp duty is a consequence of a transfer. Unrelated to tax deduction issues etc. Duty applies whether property produces income or not. Stamp duty is a state tax on property transfers in whole or part. The purpose for the transfer or property use is of no concern unless the buyer meets a duty exemption. And that only impacts the duty. The deductibility issues are a secondary aspect.

A good example of this occurs in NSW. The spouse transfer rule allows a single owner to sell 50% to their spouse / defacto etc provided it is their home at that time. The next day they can move out and rent it with a higher deductible loan etc than the day prior.

 

If you have separate loans he or she could receive the sale proceeds and then offset their debt.