There’s not much to be said for making assumptions. It seldom works out well. You may find this true if you act on a common misconception. This is the fallacyRead on to learn more.
How does the tax office view family transfers?
Most transactions involving the transfer of goods or property are documented in contracts for sale. However, this is not necessarily the case when one family member transfers property to another.
Family transfers are generally defined as those in which one relative gifts or sells a partial or entire property to another. A transaction in which one person is removed from the title of a property originally purchased jointly is also considered a family transfer.
Most of these transactions are documented in Memorandums of Transfer.
As per Revenue NSW mandates anyone purchasing or otherwise acquiring property to pay transfer duty. Basically this means that transfer duty applies to family transfers — even if no Contract for Sale is recorded or there is no purchase price associated with the transaction. If the transfer is limited to only part of the property, payment of transfer duty is required for that portion.
How is transfer duty calculated?
Transfer duty is based on the dutiable value of the property, which is defined as either the purchase price or market value (depending on which is greater).
Anytime relatives transfer property, Revenue NSW mandates an independent valuation of the property in question. This is required to ensure an accurate determination of its market value. More often than not, independent valuation determines that the market value of the property exceeds the purchase price of property transferred by family. Transfer duty is then assessed accordingly.
The importance of proper planning
Knowing in advance that you must pay transfer duty on any property acquired through a family transfer allows you to plan accordingly. Specifically, you can make sure you have enough money to cover this obligation. More importantly, you can do so before settlement when the Memorandum of Transfer is lodged with Land Registry Services.
On the other hand, let’s say you simply assumed you wouldn’t have to pay transfer duty. Let’s also say that based on this assumption, you didn’t save accordingly. In this case, you may find that you need to take out a loan or organise other financing to cover the cost.
Exceptions to the rule
You should also be aware there are some circumstances in which transfer duty does not apply to family transfers. For example:
- An exemption applies to transfer of matrimonial property based on the dissolution, annulment or breakdown of a marriage. Specifically, it applies if the transfer is reflected in Court Orders or a Financial Agreement made under applicable law. It also applies to transfer of relationship property due to the breakdown or dissolution of a domestic relationship. This is contingent upon, a Court Order or a Termination Agreement made under applicable law.
- The transfer of a primary residence for the purposes of adding a spouse or de facto partner is also exempt in certain circumstances. This is the case if the transfer is made so the couple owns the property equally (either as joint tenants or tenants in common in equal shares).
Minimal transfer duty applies to the transfer of property from a deceased family member to a beneficiary. This is so as long as the transfer is made in accordance with the deceased’s Will or the rules of intestacy.
It is also important to note that there may be additional requirements to qualify for these exemptions or modifications.
The bottom line
Clearly, family transfers are not always simple. In most cases, the recipient is responsible for paying transfer duty on the acquired. It does not matter if the property is a gift or if it is sold outright.
Two factors are used to calculate the transfer duty. One is the property’s market value as determined through independent valuation. The other is the purchase price. Transfer duty is based on the greater of the two.
By knowing your obligations regarding transfer duty on family transfers, you can avoid unnecessary complications and delays. Seek legal advice if you have questions or concerns about these obligations, or the exemptions detailed above. You can reach us through our website, by email or by phone.