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A family (or discretionary) trust can be a good way to hold assets to protect them from claims that are made against you or your business … so why not put your house in a trust?

We have heard of stories of businesses that have gone under leaving creditors, suppliers and subcontractors out of pocket, yet the business owner manages to walk away with their house and other assets. Sadly, some of you have experienced this yourself losing money only to see the other partly well off afterwards.

For the purposes of this article there are two main types of asset groups those that are risky and those that are safe. For example:

  • Risky assets – Business (there is the chance that something could go wrong in the business leading it going under).
  • Safe assets – Houses, shares, other investments.

When we make recommendations in how to structure a business, we look to separate the Risky assets from the Safe assets; that way, if something was to happen in the business – for example a large claim against the business – then there is separation such that creditors can’t get access to the safe assets like your house. 

The downside or implications of owning your house in a trust.

Your ‘main residence’, typically your home, is generally exempt from Capital Gains Tax (CGT) and can be determined to be so by the following qualifications:

  • The dwelling has been the home of you, your partner and other dependants for the whole period you've owned it,
  • It has not been used to produce assessable income (that is, you've not run a business from it, rented it out or flipped it), and
  • is on land of two hectares or less.

Mingos vs Federal Commissioner of Taxation 2019

In a recent case brought before the courts, Mingos vs Federal Commissioner of Taxation 2019, the claimants lost the Principal Place of Residence Tax Exemption and ended up with a significant taxation bill when they came to sell the property.

In the qualifications listed above, the first point states “… the whole period you’ve owned it…”. In the Mingos case, the property was owned by a trust but lived in by the owners of the trust who wished to claim the main residence exemption and not pay tax on the capital gain. Despite using various different arguments, they were unable to convince the court that the property was not a trust asset but a personal asset and therefore not subject to CGT.

The end result was that as the property had appreciated in value significantly over the time they owned it – by approximately $800,000 – they ended by with a taxable capital gain of $400,000. Tax on $400,000 – depending on who it is distributed to and their existing taxable income – could be up to $190,000. Very good reason not to use a trust!

In the next article I will cover how to protect your assets, in the event that something does go wrong with your business and make it hard for creditors to get access to them.

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