CASE STUDY: The cost of poor advice. Paying CGT on the sale of the home

A new client recently came to see me.

He was a little hesitant at first as he had been using an accountant, lawyer, and financial planner and was apprehensive about the value Metropole Wealth Advisory could give.

He left my office almost in tears when he realised the cost of his poor previous advice.

Given that my client was in the type of occupation where he had a high chance that he could be sued, he owned his family home in a trust using a company as trustee.

He was now in the process of selling his home and then purchasing a new home and was planning to use the same structure as he had previously used – that is buying his new home in a trust.

He was prepared to accept that the loss of the ability to claim the main residence exemption for Capital Gains Tax was a trade-off, given his potential litigation risk.

This could not have been further from the truth

There are a number of strategies to protect assets in a personal name without owning them in a trust.

The benefit of using alternate structures for your homeownership is that you retain the capital gains tax exemption and the land tax exemption which, for this, the client was significant especially when asset protection is part of the alternative structure.

Back to the client’s situation

Had the client executed appropriate documentation when the property was purchased in the trust the main residence exemption would have still been available.

To add salt to the wound his accountant had not accurately monitored the land tax assessments which meant that the client was being undercharged by approximately $12,000 per year and now that he was selling his property, this shortfall will become evident when the purchaser requests a land tax clearance certificate.

While the correct advice would still have the same land tax levied, the incorrect payments will attract penalties that can be as high as 90% plus a penalty interest charge.

Given that incorrect payments had been made over the last 7 years the costs will be significant.

The problem is Land Tax is self-assessed so the onus is on the taxpayer to ensure compliance even if the assessments are issued incorrectly.

The alternative

Putting together the correct documentation on purchasing the home in the trust would have resulted in the upcoming sale being totally tax-exempt which on over $1.1 million capital gain would have saved approximately $260,000 in capital gains tax.

The client’s sense of relief to have identified what not to do next time was very evident.

If the client had not been selling, then appropriate strategies could have been implemented to protect part of the future capital gains from tax liability on any future sale.

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About Ken Raiss Ken is director of Metropole Wealth Advisory and gives strategic expert advice to property investors, professionals and business owners. He is in a unique position to blend his skills of accounting, wealth advisory, property investing, financial planning and small business. View his articles