Transferring Property from Trust to Individual

Background: Our clients, Mr. and Mrs. Billingham, control a discretionary trust that holds several valuable investment properties. Mr. Billingham contacted us to inquire about the tax consequences of transferring property into Mrs. Billingham’s personal name. They purchased the property in 2007 for $800K in Baulkham Hills, NSW, and its current market value is approximately $2.8 million. Total unrealised capital gain (CGT) is $2Mil.

Transferring Property


Challenges: A transfer of property in Australia from a Trust to a beneficiary is treated as a sale of property, which triggers both Stamp Duty and Capital Gains Tax. It is an expensive exercise to transfer investment properties or any assets from the Trust to individual ownership. The Trust will make $2Mil gross capital gain if the investment property gets transferred to Mrs. Billingham. Mrs. Billingham will have a stamp duty liability of $137K.


Findings from our meeting: The clients are currently going through a separation, and they would like to do a financial settlement without finalising their divorce. They are not sure how to start the process.


Solution: In this scenario, the property transfer from the discretionary trust to Mr. Smith’s spouse, Mrs. Smith, typically triggers a CGT event for the trust. This would require a determination of whether a capital gain or loss has occurred for the trust and an assessment of the cost base of the property for Mrs. Smith. The market value substitution rules would normally be considered if Mrs. Smith does not provide any consideration for the property or if the parties are not dealing with each other at arm’s length.


However, Section 126-15 of the Income Tax Assessment Act 1997 (ITAA 1997) provides a form of CGT rollover relief that can apply in situations like this [1]. To qualify for this rollover relief:

  1. The CGT event must involve a trust transferring an asset to an individual who is a spouse or former spouse of another individual.
  2. The transfer must occur due to one of the reasons specified in Section 126-15, such as a court order under the Family Law Act related to the breakdown of relationships between spouses.

If both of these conditions are met, the rollover relief applies automatically. If the rollover relief applies to the transfer of the property from the trust to Mrs. Smith:

  1. Any capital gain or loss made by the trust will be disregarded for CGT purposes.
  2. Mrs. Smith will inherit the trust’s cost base in the property for CGT purposes rather than having it reset to market value.

It is important to note that if a trust transfers a CGT asset to a spouse or former spouse, and rollover relief applies, adjustments to the cost base and reduced cost base of units in the trust or loans made to the trust may also be triggered. However, in this case, this is a discretionary Trust, and the adjustments are unlikely to be relevant.

Mr. and Mrs. Billingham decided not to do this transfer privately since they want to avoid both $2mil Capital gain and $137K stamp duty. They have decided to get a court order for this transfer.

It was also decided with the court order one of the directors and shareholders will resign from the trustee company. This individual will also remove themselves as a named beneficiary of the trust and relinquish the appointorship.

We connected Mr. and Mrs. Billingham with one of our legal contacts to guide them on separation and financial settlement matters.

Reader Alert for the Case Study: Considerations in Private or Informal Agreements

While our case study delves into the nuances of transferring investment properties from trusts to individuals, it’s crucial to note the implications of private or informal agreements:

  • The rollover relief does not apply if the investment properties are divided under a private or informal agreement.
  • For the transferor: If you transfer an investment property in such an agreement, any capital gain or loss incurred must be reported when completing your tax return for that year.
  • For the transferee: When an investment property is transferred to you under these conditions, it’s treated as if you acquired it at the time of the transfer.
  • Valuation: The transaction assumes a market value stance if:
    1. The amount paid for the investment property differs (either more or less) from its market value.
    2. The two former spouses aren’t dealing at arm’s length.

It’s essential to be wary of these nuances when navigating property transfers and asset divisions in divorce scenarios [2}.

Plan of Action:

  1. Understand the Trust Structure:
    • Before taking any action, ensure you have a clear understanding of the assets held within the discretionary trust. Knowing the type and value of each asset is crucial.
  2. Engage Professional Help:
    • Given the complexities involved in divorces and trusts, consider consulting with both a family law attorney and a tax professional. They can provide guidance tailored to your specific situation.
  3. Be careful of Private Arrangement:
    • Both Stamp duty and Capital gain Tax may trigger if you do a financial settlement without a court order.
  4. Review the Family Court Order:
    • Analyse the specific directives and stipulations mentioned in the order, especially concerning investment property transfers.
  5. Tax Implications:
    • Understand the potential tax liabilities that can arise from transferring investment properties out of a trust. In Australia, this may trigger both Stamp Duty and Capital Gains Tax.
    • Explore available tax reliefs such as the CGT Rollover Relief for Marriage Breakdown. Consult a tax professional to determine eligibility.
  6. Evaluate Financial Impact:
    • Beyond taxes, assess the broader financial implications of the property transfer. Consider the costs involved in the transfer process and if there are any potential future liabilities.
  7. Alternative Scenarios:
    • If faced with significant tax implications, consider alternative solutions. For instance, instead of a direct property transfer, selling the property to a third party, as mentioned in the case study, might be an option to explore.
  8. Update Estate Plans:
    • Post-divorce and after the property transfer, it’s crucial to revisit and possibly update your will and any other estate planning documents to ensure they reflect your current wishes and the new state of assets.
  9. Stay Updated:
    • Laws and regulations surrounding trusts, property transfers, and divorce settlements can change. Stay informed about any updates to ensure continued compliance and optimise financial outcomes.
  10. Finalise the Settlement:
    • Once all issues are addressed and actions are taken, ensure the settlement is finalised as per the court’s directives.

Divorce and separation take a toll both emotionally and financially. Many individuals make decisions based on emotions, leading to several mistakes during the transfer of assets without understanding the tax consequences. It’s crucial to seek expert guidance. Investax accountants possess the expertise to navigate the intricacies of divorce settlements, particularly when it comes to managing investment properties. With our in-depth knowledge and personalised approach, we simplify complex processes and ensure you achieve the best financial outcomes during these challenging times.

Reference:

  1. Income Tax Assessment Act 1997 (ITAA 1997)
  2. Be wary of Informal or private divorce settlements without a court order/ ATO