Family Trust and investment property.

[douglas]

Hi.

We have a family trust, in which we have 100% gifted our family home. We also own an investment property which is 14 hectares of native bush overlooking the sea. We are in the process of building a Bach/house on the property. The dwelling is near completion though yet to have an installed running water/plumbing system inside or a permanent electrical system. We are currently using a generator and batteries when we stay there.

Our family home is valued at 500k and we owe 96k on the mortgage. Our investment property has a GV of 350k and we owe 98k on the mortgage. Around 20 years ago we planted Tasmanian Blackwood trees on a small portion of the investment property and we registered for GST at that time. The investment property generates no income.

Should we gift the investment property to the family trust? What would be the pros and cons of doing so?

Any help or suggestions would be much appreciated.

[Rosco]

Hi Douglas,

Just curious, you say investment property, but that it also generates no income. So is this really a private holiday home?

If this property becomes short term accommodation, then it would be a taxable activity and fall under the GST net. This isn't normally a problem as most holiday homes receive under $60,000 of income per year so don't have to GST register(this is per entity not holiday home). But you mention the entity is GST registered, so if holiday home becomes a short term rental you need to be very careful and think things through fully and get advice.

Should you still be GST registered? If there isn't really a business anymore, then you might be better to deregister or at least this is an option. Note you will have to repay GST at today's values (often a reason why not to GST register small blocks or toy farms)

If you do want to sell the property to your Trust, you will need to work out these GST issues and whether the Trust should be registered or not? Also have to consider what other assets the Trust might own long term and how GST could affect them.

Also is there a risk with the block? Generally you want to put safe and secure investments into a Trust and nothing risky. Otherwise if it all went horribly wrong and you were liable for $2 million health and safety claim on the forestry block, if the Trust owned the forestry block, then you might lose the block and your personal house.

Forestry transfer rules - sorry this is something I know nothing about, except that there is likely to be rules around setting the forestry value for related party sales and this could create a taxable profit in your current entity. So you would want to check these implications first.

2 year brightline test will apply to the new owner if you transfer, so if you then resell within 2 years, any gains from buying value will be taxable.

Lots to think about! If you have high risk levels and asset protection is very important to you, then there is smarter ways to restructure rather than putting into the Trust!

Ross

[douglas]

Hi Ross,

Thanks for the advice.

Yes, I suppose in reality it is mainly a holiday home block but with a small portion of forestry on it.

We bought the land in 1993 thinking that it may serve as a form of retirement income. That's why I referred to it as an investment - maybe not the best description...

When the dwelling is complete, we may well consider offering it as short term accommodation.

What do you mean when you say; is there a risk with the block?

What would be some other smarter ways to restructure?

Doug