Whose House Is It Anyway?

The CGT trap in putting Mum on the title

It is one of the most common arrangements in Australian family finance, and one of the most expensive. A parent gifts a child the money to buy a house. The bank will not lend on the child’s income alone, so the parent goes on the title to get the loan approved. Everyone involved understands that the parent owns nothing — the money was a gift, the parent never lived there, never received rent and never claimed a deduction.

Twenty years later the house is sold. The Commissioner’s starting position is that the person on the title owns the property, and the parent is assessed on their share of a gain that may run well into seven figures. The main residence exemption does not help them, because it was never their home. Nobody thought about it at the time, and by the time anyone does, the tax has already accrued.

The position can usually be corrected. Where the child was in truth the beneficial owner and the parent held their legal interest on a bare trust, that trust relationship — not the certificate of title — determines who is assessed. The difficulty is proving it two decades after the event, on the strength of fading recollections, bank statements that no longer exist and a solicitor’s file that was closed years ago. And with the 50% CGT discount giving way to CPI indexation from 1 July 2027, the cost of failing to prove it is only going up.

Do it properly at the start

If a parent must go on title for finance reasons, the arrangement should be documented at the outset. A declaration of trust should be executed before, or at the same time as, the contract, recording that the parent holds their legal interest on trust for the child absolutely and takes no beneficial interest. That document should then be supported by a deliberate paper trail: who provided the deposit, who met every loan repayment, who paid the rates, the insurance and the maintenance, and who occupied the property.

The second step is to seek a private ruling from the ATO confirming the position straight away — not on sale. The Commissioner is being asked to accept a factual proposition about beneficial ownership. That proposition is far easier to establish while the evidence is fresh and nothing turns on the answer, than years later when several hundred thousand dollars of capital gains tax rides on it.

Duty also has to be checked before anything is signed. A declaration of trust over land is dutiable, and whether nominal duty is available depends on the apparent purchaser or bare trust provisions in the relevant State legislation, and on executing the documents in the correct order. Get the sequence wrong and a tax problem simply becomes a duty problem.

The other version: buying a house for a relative to live in rent free

The same generosity, with worse arithmetic. A house is bought in one person’s name so that a parent or an adult child can live in it rent free. The consequences are:

●      no main residence exemption, because it is not the owner’s home;

●      no deduction for interest, rates, insurance or repairs, because there is no assessable rent;

●      land tax may apply, because it is not the owner’s principal place of residence; and

●      the entire gain on sale is assessable.

The one crumb of comfort is that those non-deductible holding costs can generally be added to the cost base as third element expenditure. That requires every receipt from settlement day onwards. Most people do not keep them, and end up paying tax on money they have actually spent.

Charging a mate’s rate does not solve the problem either — deductions are capped at the rent actually received.

Get the tax advice before you sign

Conveyancers and family lawyers get the title right. They are not engaged to model a CGT event twenty years into the future, and they rarely see one coming. In almost every one of these matters, an hour of tax advice before the contract was signed would have been a rounding error against the tax bill that eventually followed.

If you or someone in your family is about to buy a property in a name that is not the name of the person who will really own it, speak to us before you sign. It is a very cheap conversation compared with the alternative.