Subject to certain conditions, it is possible in Western Australia for someone who is married or has been in a de facto relationship for 2 years or more to transfer part of the family home to their partner, and for that transfer to be exempt from transfer duty.
The desire to affect this transfer can arise for many reasons, be it asset protection, estate planning, at the behest of a bank or mortgage broker when applying for a loan, the belief there are tax benefits, or of course, for natural love and affection.
While actioning the transfer may be the result of well-intentioned reasoning, such a transfer may have some unintended tax consequences.
While the transfer may be exempt from transfer duty, there is no such exemption for capital gains tax purposes (with the exception being a transfer arising from a relationship breakdown). The transfer results in the prevailing market value for the part interest being treated as the transferor’s proceeds for the sale, and the transferee’s cost base or their interest. This may not cause any issue if the property has always qualified for the main residence exemption. But what if it hadn’t always been so?
What if the property was a rental property when it was acquired, and subsequently became the transferor’s main residence? In this case only a partial main residence exemption may apply to the property. The transfer of the part interest in the property is a CGT event for which market value proceeds have been received. A capital gain or loss may arise depending on the cost base of the property.
Consideration to the main residence status of the property is essential as it may lead to a real cash outflow as a result of a realised capital gain.
There can be flow on consequences should the property’s use change after the transfer. Let’s say the property starts being rented out, and the couple are now earning rental income. If the transferor had initially taken out a mortgage buy the property, however now continues to have the mortgage but only owns half of the property, can 100% of the interest expense be claimed? It should not be assumed that this is the case.
For any pre-CGT properties, such a transfer will mean the transferee’s interest in the property is now a post-CGT asset.
The above is not an exhaustive list of the potential tax impacts. The transfer cannot be undone, so it is important that the potential tax impacts are understood before any contracts are signed to affect the transfer.
If you have any questions on the property transfers please contact Ross Prosper.