Giving property to a family member might be a kind way to support loved ones, however, there are financial and legal responsibilities involved that you must be aware of. This article will discuss the various methods that family members might transfer property to one another, the associated fees and any taxes or liabilities that may arise from this transaction.
Property title in Australia
In Australia, a property title is the legal document that established ownership of real property. The title proves you have right to use and transfer the property and confirms the details of any encumbrances. This includes any mortgage on the property, caveat, covenants or easements. Any sale, purchase or when a property is subject to a mortgage, is information that must be recorded with the Australian Government.
A title can be held in physical paper form as a Certificate of Title or electronically. These days a Certificate of Title is mainly kept in digital form with the introduction of electronic conveyancing.
Each state and territory is in charge of maintaining its own register of titles. As such there are variations in the costs, laws and regulations pertaining to a transfer of title in each different state and territory.
The procedure for transferring a title between family members is the same as for any other property transfer; it involves removing one individual from the title and adding another.
Gifting property in Australia
In Australia, it is possible to gift property to a relative or other individual through a transfer of property title. Filing a Transfer of Land with the title office in your state or territory is the first step in this process.
The gifting process may also require you to file a Deed of Gift. This is because an official Contract of Sale may not be required in the gifting process. A valid Deed of Gift will allow you to transfer the ownership of the property voluntarily and without exchanging money. A Lawyer can help you prepare a legally valid Deed of Gift.
If you went ahead and sold a property to a family member for any amount (even discounted), this procedure would operate substantially the same as if you sold your property to any other individual. A normal Contract for Sale would have to be prepared and executed. Both parties would need to hire a Lawyer or Conveyancer.
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Transferring property to a family member
When transferring property to a family member, this is commonly referred to as a ‘related party transfer’. There are numerous approaches to achieving this, such as:
- As a gift for no consideration (i.e. where no money in exchanged in return for being given the property);
- By sale of the property to a family member at a discount to market value; or
- Adding a spouse or other family member to the Certificate of Title, which is the property’s ownership record, in order to transfer ownership of the property.
Reasons for people wanting to transfer property between family members may include:
- Asset protection;
- Tax purposes;
- Parents wishing to assist their children;
- Elderly parents wanting to give their children property instead of leaving their property in a will;
- Couples who are divorcing; and
- Family looking to change ownership shares in investment properties.
Although it sounds like a simple transaction, there are a few things to consider before transferring property.
What to consider when transferring property
Capital gains tax
The related party transaction may have tax ramifications, including capital gains tax. For example, if the property being transferred is not the seller’s primary residence but rather an investment property, capital gains will be assessed on the market value of the property at the time the property is gifted or sold. This is an assessment of what the property would sell for in the open market. It is not assessed on the value of the amount of money that changed hands when the property was sold to the family member.
If a parent chooses to give their child an investment property without adequately planning, they may receive an unexpected capital gains bill from the ATO. In certain situations, a Deed may be drafted that specifies the child will cover the capital gains tax of the gifting parents. However, each situation is different and you should seek professional advice in relation to tax before embarking on such a transaction.
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Transfer duty (Stamp Duty)
Transfer duty, also sometimes referred to a stamp duty, is essentially a fee that the government charges for a change of title (i.e. transfer of title). Unless certain limited exemptions apply, stamp duty will be payable when property is gifted.
Stamp duty is generally calculated based on the property value, property use (i.e. residential or investment), property description (i.e. either established home, newly constructes home or vacant land), whether you are a first home buyer or a foreign investor. It is calculated on the market value of the property. It is not based on the contract price (being the price that the property was sold) or the gift status.
Stamp duty is a state-based tax, as such each state has different rules pertaining to stamp duty. In New South Wales there are exemptions and concessions for family transfers. If the transfer is between married couples or de facto partners and the home is your primary place of residence, you will not have to pay stamp duty. If a domestic relationship ends and a transfer of title is needed, you may also be exempt in this circumstance.
However, if your family home is used for other purposes, for example, it is an investment or used for the operation and running of a business, stamp duty may be payable upon transfer. Stamp duty may also be payable if the family home owners are living overseas.
With respect to deceased estate transfers if you have received property ‘in accordance with the terms of the will’, you will pay transfer duty at a concessional rate of $50.
If the terms of the will are not followed and property is distributed in a different manner and not ‘in accordance with the will’, for example one beneficiary wishes to become owner of property left to another or the beneficiaries agree to become owners of different properties, then the standard rate of stamp duty may apply.
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Government Pension
Giving a house as a gift could have repercussions outside of taxes. Elderly parents must exercise caution when it comes to their pension benefits. When property is gifted and no money is exchanged, Centrelink will still assess the market value of the transferred property as the amount of the income, even if no money was exchanged during the gifting.
For example, you gift a home to your child that has a market value of $1,200,000. Centrelink will assess the $1,200,000 as sale proceeds (income) even if you sold the property for $500 to the child.
In such a case, you may be at risk of losing your pension benefits because the income amount from the sale will be assessed in accordance with the entitlement income and asset test. If you are over the income threshold, it may render you completely ineligible. It is prudent that if you receive a pension from Centrelink to seek advice in relation to the rules it has in place around gifting.
You also need to confirm whether you have what is called a ‘Granny flat interest’. A ‘Granny flat interest’ is an arrangement where you transfer the title of your home to someone else, however, it is agreed that you retain the right to live there for life. Such an agreement can affect your eligibility or rate for pension payments. If you decide to enter into a Granny flat agreement, it is best you to obtain both financial and legal advice about such matters as there may be a variety of implications involved on the parent that may extend beyond just pension payments.
Asset Protection
One reason for transferring property is an asset protection strategy. For example, transferring property into a trust. This can protect property being subject to lawsuits or family law claims. This strategy can be useful for asset protection and estate planning. Depending on the type of trust and the beneficiaries, transferring property into a trust may have certain stamp duty and tax consequences.
It is highly recommended that you consult a Lawyer and a tax expert before implementing any asset protection strategy. They can help you understand any the tax ramifications, assist you with the legal process, make sure your transfer goes well and the property is properly protected in accordance with your needs.
Mortgage on title
It becomes more complicated if the property is already subject to an existing mortgage. The recipient of the property in question must go through a loan approval process if the loan is also to be transferred.
Before considering a title transfer, you must seek the advice of your lender and obtain professional guidance regarding any potential tax and other financial ramifications with respect to the mortgage. They will help you to accurately assess whether the person you are gifting the property to can afford the mortgage.
Additional costs and expenses
Various additional costs may apply to a property transfer in addition to taxes. An independent valuation will need to be obtained for tax filing purposes to determine the market value of the property at the time the gifting took place.
Additionally, the following legal fees may apply:
- Professional legal advice that will determine with more certainty your tax and duty liability.
- Cost of drafting the required Deeds and agreements needed for a valid transfer.
- Transfer costs pertaining to the documents required for the transfer of the property .
Other costs to consider is the ongoing expenditure in relation to owning the property, such as maintenance, council and water rates, insurance and strata levies.
Get help and contact us today!
At Sydney City Legal Practice, we can help you to reduce your tax liability by structuring your taxable estate and offering you expert guidance. If you are planning to gift property, we will confirm if any exemptions are applicable to you. Our advice will safeguard and protect you from any unnecessary tax and other problems that may arise. Contact us today for a free consultation on 0437 822 808 or submit an online enquiry here .
Author: Carolina Reveco, Principal of Sydney City Legal Practice
This article is to serve as a general information source only. This publication contains opinions, examples, words, and extracts from legislation and other sources; it should not be used as a source of legal, financial or tax advice. To obtain personalised legal advice tailored to your needs that can be relied upon, please reach out and speak to our legal team.
