Hi All,
I have a friend who is currently renting an apartment from his parents in law.
He approached them asking if he could buy the apartment from them instead of simply paying them rent.
They were keen on the idea, however they don’t want to sell for another 8 years (as this is when his Father in law retires, and can then sell the apartment CGT free).
My friend asked if he could lock in a price with them now (say 400,000 for example), and in the coming 8 years pay the parents in law the equivalent weekly amount he is currently paying in rent in order to pay down this 400,000 value.
Assuming he paid $300 per week, after 8 years he would then buy the apartment from the parents for 275,500 (400,000 – 8x52x300)
What are the tax implications for the parents in law in this situation? would they be liable to pay CGT on the 8 years of payments leading up to the sale?
Alternatively, what are they implications of considering the next 8 years’ payments as ‘rent’ on paper, and then selling the property to my friend at well-below market value?
Any thoughts greatly appreciated!
Cheers,
.
I did not know once you retire you can sell assets CGT free – from the sounds of it, you've done the research and have determined that retirees can do this.
If this is the case if your friend keeps those payments up but put it as 'rent' on paper and buys the property for $275,000.00 in 8 years time, it would be CGT free.
However, if this is not the case and retirees cannot sell assets CGT free then your friend purchasing the property at well below market in 8 years time will count as a 'non arms length' transaction in which case the market value of the property will be used as the capital proceeds from sale when calculating your friends step parents capital gain.
Get them to look at selling to him either using an Put & Call Option or instalment contract with a minimum term.
Either of these would appear to satisfy the problem.
Richard Taylor | Australia's leading private lender
Thanks heaps guys.
Do you know if clear docs (or any other online legal document generator) would likely have a pre-written instalment contact or put/call option? I can’t seem to find one but perhaps you know of one?
If not. then how much do you think a lawyer would charge to draft up a water-tight one that my friend could use?
Cheers,
.
Hi Richard,
With the instalment contract, would the date of sale be the date of the first instalment payment or the last instalment payment? And is this the same date used to calculate the CGT payable (and if this date falls after my friend’s father in law retires will he effectively pay less tax on the sale?)
Cheers,
.
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The parents in law would be up for CGT whether they are retired or not. They wouild pay less CGT in retirement (assuming they would be earning less income in retirement), but they would still pay SOME CGT.
(I am assuming the property is not held in an SMSF)
Don't forget though if you enter a contract with a option to buy in 8 years for well below market – fair enough the parents will not need to pay any CGT due to the arms length transaction vs market value rull.
But you've technically made a gain on excercising your option, the gain being the difference between the price you pay and the market value of the asset. You will be subject to tax on that difference.
Oops sorry – I got a bit confused.
It depends on who has the option (i.e. if it's a call or a put)
There are some ATO IDs issued for installment contracts. I forget the result, but usually CGT is payable based on the dates of the contracts.
It may be easier to use an option agreement combined with a lease – and you won't find one on clear docs, you will need to have one drawn up as the strike price would (or could) be dropping as a portion of the rent would go towards the purchase price.
For CGT purposes the option fee received is a capital gain – but you can make this a low amount so the CGT will be small.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
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With an installment Contract Tax is paid on the "Emerging Profits" basis so incremental each year as the profit increases.
Richard Taylor | Australia's leading private lender
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