We recently sat down with Marita Pangallo, Barrister as she shares her thoughts on the advantages and disadvantages of tax structures for holding property. She will be delving further into this topic at the upcoming Property Taxes for All Lawyers seminar.
What’s something practitioners should consider at the outset when beginning to consider the best tax structure for holding real property? How should someone start when considering multiple options like SMSFs, discretionary trusts, unit trusts or holding companies?
The starting point in creating a structure to hold real property is to decide what outcomes the client wants to achieve and ask questions such as: is the client wanting a structure to minimise or offset taxation? Are they wanting asset protection? Are they wanting to have control over the structure? Is the property an investment? Is the property going to be used for their own business purposes? How will the purchase of the property be funded? What structure will the lender allow? Will the client be happy to spend money on the maintenance of the structure? What succession plan does the client have? What estate planning will the client require?
The answers to these practical questions will ultimately lead the practitioner to decide what options are available to their client and depending on the complexity of the structure, what additional advices may be required. As a general rule, at first instance, practitioners should work closely with their client’s accountants and financial advisors to confirm that the structure they are promoting, will be financially beneficial to their client. Engagement with Counsel on the structure may be required during the drafting stage if there are specific outcomes that the client wishes to achieve which may not be
When creating structures for clients, a collaborative approach with their financial and taxation advisors, is, in my view, best practice.
Is there an aspect of a particular tax structure for holding property that some practitioners may not fully appreciate?
Self-managed Superannuation Funds are a great vehicle for holding investment property, especially for client’s who are looking to boost their superannuation either before their transition to retirement or during pension mode. Despite this, Self-Managed Superannuation Funds are not to be entered into without careful consideration of the risks, benefits and costs involved.
A Self-Managed Superannuation Fund can allow greater control and estate planning benefits, but does require the trustee to devote time, skill and prudential responsibilities, as well as fulfillment of a range of legal obligations to ensure that the fund remains compliant. It has been my experience that many practitioners are keen to set up these structures for their clients, without providing their clients with the clear advice of the compliance and maintenance involved.
Solicitors should be aware of the decision in Australasian Annuities Pty Ltd (in Liq) v Rowley Super Fund Pty Ltd  VSCA 9. This was a case which considered the breach of fiduciary duties – a corporate trustee of a discretionary trust borrowed money to make employer superannuation contributions, pay eligible termination payments, and make loans to beneficiaries which amounts were in turn used to make further superannuation contributions. The director of the corporate trustee was held to have breached their fiduciary duties as they sought to benefit themselves and their family in the course of the transactions and, in doing so, he failed to consider the other beneficiaries of the trust. This ultimately allowed creditors to claw back all of the contributions made to the superannuation fund. Directors of corporate trustees should consider documenting their resolutions so that they have considered the interests of all of the beneficiaries when related party transactions are undertaken.
In your experience as a barrister, where do you see property tax issues often go wrong and lead to disputes?
One area where issues often occur is following a Family Law property settlement. There can be unintended taxation consequences that can be triggered where property is transferred out of a trust which practitioners aren’t always aware. To prevent any such taxation liabilities, the outgoing spouse should ensure that any future tax liability is factored into the orders made by the Court, or alternatively, that they are indemnified by the trustee and the continuing party. Moreover, parties in Family Law litigation attempt to amend their trust deeds, either in anticipation of Family Law Property litigation, or following a settlement. Certain amendments to Trust Deeds can trigger a Resettlement, which can have tax consequences.
The other important reminder I make to practitioners is that the Commissioner of Taxation can investigate an arrangement that might be set up under Party IVA of the Income Tax Assessment Act 1936 (Cth). Under the legislation the Commissioner has the power to investigate the establishment of new, as well as the amendment of existing business or investment structures. He can then determine whether, in his belief, the arrangement contravenes the anti-avoidance provisions under Part IVA. If the Commissioner can make the argument that the arrangement was undertaken for the sole or dominant purpose of obtaining a tax benefit, he may cancel the tax benefit and impose penalty tax. There may be the ability to rebut the Commissioner’s argument, but this would involve expense in litigious proceedings with uncertain results.
Marita Pangallo was admitted to practise in 2009 and joined the Independent Bar in 2018.
Practising law for over 9 years, Marita has particular interest and expertise in Trusts and Equity, Wills and Estates, Family Provision claims, Business Succession, Commercial Litigation, Real Property, Corporations Law, State Taxation and Family Law. Marita enjoys using her commercial skills to assist on complex family law matters, particularly those involving family businesses or trust structures.
Before moving to the Bar, Marita worked for a series of boutique commercial law firms, where her practice also included Corporate Insolvency, Corporate Advisory and Employment Law.
Marita has appeared before a variety of jurisdictions, including the South Australian Employment Tribunal, District and Supreme Courts as well as the Federal Circuit Court.