There are ways to save stamp duty.
Save Stamp Duty
Stamp duty – officially called transfer duty – is massive. With no adjustment to brackets over the past 15 years, stamp duty bracket creep has skyrocketed with the boom in property prices. So minimising stamp duty can save you a lot of money. But how?
This is the question Geoff Stein of Brown Wright Stein Lawyers in Sydney will discuss with you in this episode.
Here is what we learned but please listen in as Geoff explains all this much better than we ever could.
To listen while you drive, walk or work, just access the episode through a free podcast app on your mobile phone.
How to Save Stamp Duty
There are various ways to save stamp duty – let’s go through seven of those.
1 – First Home Buyers Assistance Scheme
2 – Death
3 – Family Farm Exemption
4 – ‘Funny’ Business
5 – Separate Furniture and Fittings
6 – Joint Ventures
7 – Other ways to save stamp duty
Stamp duty is a state tax, so every state and territory has slightly different rules but the framework is the same.
1 – First Homebuyers Assistance Scheme
All Australian states and territories have a scheme to help first home buyers – we looked at the one for NSW.
To qualify for the NSW First Homebuyers Assistance Scheme, you must apply for the concession – so it is not automatic – and you must pass three sets of tests.
The first one is about the contract. It must be for the whole property – so if you want to buy parts of a property, you need to first strata-title it.
The second set of rules is about you. You must be over 18 and an individual, so not a company or trust. This must be your first residential property in Australia and you must never have benefited from this scheme before. The same applies to your spouse or partner if you have one. And at least one of you must be an Australian citizen or permanent resident.
The third set of rules is about what you do with the property. You must move in within 12 months, and live there for at least six continuous months.
The actual concession depends on the value of your home and depends on whether it is a new or established home or just land. New homes get the highest threshold, land the lowest.
If your new or established home or land is less than $800,000, $650,000 or $400,000 respectively – no stamp duty to pay.
If your new or established home or land is more than that, you don’t get a full exemption. But you still receive a partial exemption if the value is less than $1m, $800,000 or $500,000 respectively.
2 – Death
If you pass land on through a will – no stamp duty. The disadvantage is that somebody has to die first.
3 – Family Farm Exemption
For this one nobody has to die. You can pass on your land to the next generation – stamp duty free – and retire on the proceeds.
But this exemption only applies to land used in primary production. And only if the land is passed on to relatives. The aim is to encourage younger family members to stay on the farm and continue running the business .
In NSW the exemption covers other property integral to the primary production, for example a water license.
Queensland includes (but not limited to) excavating, printing and publishing, upholstering, laundry services, restaurants and service stations in their exemption.
Tasmania allows an exemption even if the land is leased and it is used by the lessee for primary production, provided that the land continues to be used for primary production after the land title transfer.
In South Australia, the relative must have a ‘business relationship’ for the 12 months prior to the land transfer.
It gets more complicated when the transferee is a company or trust.
When you look into this, make sure you apply the stamp duty law of the state in which the property is located.
4 – ‘Funny’ Business
And then there is the possibility of doing ‘funny business’ to reduce stamp duty. An example:
In August 2020 the Sydney Morning Herald Sun published an article where a family lost against their landlord in court and had to leave their rental home. The family had rented the house with an option to buy. The relationship soured and the landlord no longer wanted to honour that contract. So far just a dispute between two parties to a contract – happens every day.
Where it gets strange is a paragraph further down in the article that says that the landlord had become a consultant to the tenant’s company and received consultancy fees of $1.43m over 5 years from the start of the lease.
And these $1.43m + GST in fees became a point of contention. The tenant claims that the $1.43m were occupancy payments and hence should be refunded if the sale wasn’t going ahead.
So the big question is, why would consultancy fees be viewed as occupancy payments?
If you – just in theory – relabelled parts of a property purchase price as consultancy fees, then the buyer would save on stamp duty. And since this is a main residence, the lower cost base wouldn’t result in higher CGT later on when you sell, since you don’t pay any CGT on your home anyway thanks to the CGT main residence exemption.
So reducing the purchase price of a $13.2m mansion by $1.43m, you save about $100k in stamp duty – always assuming that the NSW Revenue office doesn’t start asking questions. $100k is not a big saving when you spend $13m on a house, but $100k is $100k. So saving $100k is a plus – for the buyer. But what about the seller?
The seller has to treat the $1.43m as assessable income – without any discounts. If the $1.43m had been part of the purchase price, then they could at least claim the 50% CGT discount – assuming the property is not held by a company and assuming the main residence exemption doesn’t apply. But this way, the landlord/seller gets hit with the full amount as income.
So saving stamp duty on one side would mean tax at the top marginal tax rate on the other side, unless of course the seller has an income tax loss carry forward that he is unlikely to recover in any other way.
So if the seller does have an income tax loss carry forward, then this could have resulted in a win on both sides. If the sale had gone ahead, that is. And if ATO and Revenue NSW didn’t start asking questions.
5 – Separate Furniture and Fittings
Always separate dutiable property from non-dutiable property. In a house for example, separate the furniture and fittings from the house – less stamp duty.
6 – Joint Ventures
A joint venture can reduce the amount of stamp duty you pay. Rather than paying stamp duty twice by you selling to a developer and then the developer onselling the apartments, you enter a joint venture. So the developer builds the apartment block while you still own it and then you keep some apartments – no stamp duty at all – and sell the rest of the apartments directly, only incurring stamp duty once and not twice.
7 – Other Ways to Save Stamp Duty
When you look at how to structure a transaction, always consider stamp duty. Can this transaction be structured in another way where no duty is payable?
Take land rich entities as an example. Can you stagger the transactions in a way that no duty gets payable? Can you structure it around different entities?
So these are some ways to save stamp duty. There are more, but this is a start to get you thinking.
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Disclaimer: Tax Talks does not provide financial or tax advice. All information on Tax Talks is of a general nature only and might no longer be up to date or correct. You should seek professional accredited tax and financial advice when considering whether the information is suitable to your or your client’s circumstances.