When the Tax Office Wants a Cut
Author:
Rockliffs Solicitors and IP Lawyers
Publish Date: June 21, 2010
There can be unfortunate tax consequences when you decide to protect your mother or father's interests in the event that anything should happen to you in advance of their death.
If you sign a deed giving your mother or father the legal right to live in a unit you own for their lifetime provided they pay rates and other outgoings, you can face an unfortunate tax sting. You may be subject to capital gains tax on the market value of their right of residence.
The tax office says that the creation of a personal right to live in a property for life triggers a tax event which deals with the creation of a right that did not previously exist.
There are no capital gains tax consequences if nothing is given for the creation of that right. However, if money or property is given in exchange, you will be taken to have received the full market value of your parent's right to live in the unit for their lifetime.
Depending on their age and the value of the unit, this could be very little or quite a lot.
While you might say that your mother or father is not giving you anything for the right to live in the unit, the tax office sees things differently, holding that, for capital gains tax purposes, the provision of an indemnity amounts to giving property. And while there may be arguments, it seems likely that your parent's legal obligation to pay rates on the unit that you would otherwise be liable for, amounts to an indemnity and therefore the giving of property.
Reproduced with the permission of the Law Society of New South Wales.
For further information or assistance please contact Rockliffs on 02 9299 4912 or email us at lawyers@rockliffs.com.au