I recently set up a discretionary trust to purchase an investment property. After a change in cirumstances, instead of getting a tenant for the property I bought, my elderly Mum will be living there instead. She would like to pay some money per week toward rates, water, etc. (say $100/wk) but it will be less than market rent the property could get. Are there any tax implications for her or the trust if the trust doesn’t receive full market rent for the property? She isn’t a beneficiary of the trust so is not receiving a benefit by living there, however I am a beneficiary (and appointor). Thanks for any help/suggestions!
Plenty of tax and legal issues here. You should seek specific legal advice.
firstly does the trustee have the power to allow a beneficiary or a relative of a beneficiary to live there? If so can this power extend to under market value rent? (if you are a beneficiary she probably is too).
Does the trustee have a loan on the property? Would they be claiming interest or other expenses, if so the interest and other expenses would not be deductible if under market value rent is charged. Deductions may be limited to the rent received – your accountant or tax agent can cover this.
How will the trust pay for any short fall of expenses over income?
Lease in place? Should it be a lease or a right to occupy? If a lease what about the legal requirements for a bond.
What happens if you die?
What about disputes – how will these be handled?
What if you lose control of the trust?
Centrelink issues too perhaps.
it might be better if she pays market value rent and you could gift her some money separately.
Thanks for your reply.
The trust deed refers to many eligible beneficiaries, including “the parents of a named beneficiary”. The deed doesn’t refer to the property specifically, or anyone living in a trust asset. I imagine though, based on the above, that Mum living in the property would be seen as her receiving a benefit, is that correct?
There is no mortgage on the property, it was purchased with cash. The money was gifted from another trust. The trust would need to use money gifted from the other trust to pay for the shortfall in income. The trust would effectively be making a loss.
We could put a lease in place (Mum wouldn’t mind) if this is the best option, and have her pay a “bond”.
Yes, I’m unsure of any impact this may have on her age pension. If she were to pay market rent, and we gifted her money back, I believe that would be seen by Centrelink as her receiving income.
I spoke to my solicitor about all this before setting up the trust, however he only suggested speaking to an accountant. The accountant said that the only issue would be that, as you mentioned, deductions could be limited to rent received. I need to find out more before proceeding any further.
The trustee would be providing a benefit to one beneficiary at the expense of other potential beneficiaries. This may or may not be ok depending in whether the deed expressly allows it. Living there on below market rent would be a benefit.
How did another trust gift money – this would be unusual. If it was income then the income would be taxed the top marginal tax rate unless it is distributed. If it was capital this may infringe the laws against perpetuities if the second trust’s vesting date is more than 80 years after the first, or if the vesting date could not be brought forward.
The trust couldn’t be making a tax loss as no expenses would be claimable, but it could have cashflow issues.
There could be pension issues depending on a few things.
This is all legal advice so not sure why a lawyer is sending you to an accountant!
I am appointor/director/beneficiary of the trust that made the gift. My solicitor told me that we could do it this way, or make it a loan from one trust to the other. The money was gifted expressly to purchase the property. Neither my solicitor or accountant mentioned anything about perpetuities! The vesting date of the second trust is more than 80 years after the first but according to the deed can be brought forward.
If the gifting is a problem, could we have a simple loan agreement (not a mortgage) drawn up between the two trusts?
So, if Mum pays below market rent, she is receiving a benefit, and no expenses spend on the property would be claimable? Is that right?
What could the pension issues be? What do they depend on?
What is the source of the money in the first trust?
It can be done, but it depends.
But another thing is – if it can be done, that doesn’t mean it is a good idea.
I would have done it differently.
If there is no income then no expenses could be deductible – basic tax law s8-1. If she pays under market rent then expenses claimable would be limited to the amount of rent paid.
Pension issues – you are related to your mum so she will be deemed to control the trust. The trust assets may be assessed as if they are her own. Also if she was the source of the trust money in any way this could effect things too – maybe even if you were the source.
Why are you structuring like this? Considered alternatives such as Trust lending Mum to buy?
Yes, Mum contributed to the first trust. She gifted money to the trust, which she declared to Centrelink and it has been assessed in her pension. This first trust just holds cash. The second trust was established to buy the property.
By the sound of it, as you suggested at the beginning, it would be best to have her pay market rate rent, then all expenses can be claimed. Also, if paying market rate rent, she isn’t receiving a benefit of the trust over other beneficiaries, she is purely a “tenant”. Would that work?
Sorry, forgot to answer your last question. Mum doesn’t want to own property in her own name now as she ages, as she has been scammed and lost money, and also had a new “partner” take advantage of her after her husband died.
This may be better from a tax point of view, but from a social security point of view she won’t pass the control or the source test. The deeming rules may apply to the gift too.
Also from an estate planning point of view this set up has many disadvantages.
Did you get advice before this was done – did she get advice before gifting all her money away?
Centrelink have assessed the gift, including deeming, apparently. I’m unsure about the control test side of things though.
She hasn’t gifted all her money away, she just doesn’t own property anymore. We did get advice, although seemingly it wasn’t great advice after getting more information from you in this thread. We’ll find a new solicitor I think, and work through it all before going any further with the above.
Thanks for your help/suggestions.
- This reply was modified 4 years ago by going_for_gold.
Sounds like she would fail the control test – s1207v(2) Social Security Act
And the source test s1207v(3)
So that would mean the trust assets would be attributed to mum s 1208E
The trust property would also be subject to CGT and land tax possibly.
Have you considered other strategies such as buying in her name, perhaps tenants in common with a family member – 99/1 maybe. That would prevent dealings and mum’s share could be left to the trustee of a discretionary testamentary trust under her will. This would provide greater tax benefits and more asset protection (in certain aspects)