Are Trusts the best strategy to avoid tainting?

Our Experts Answer:

The tax legislation that relates to this very situation is currently under review, so I will give you an answer based on the current situation and what legislation is being proposed.

Under the current legislation, your friends would automatically be tainted by association. Tainting follows ownership, so by owning shares in a closed company (has five or less unrelated shareholders) that does property trading will taint not only themselves, but also their LAQC, parents, children, grandchildren, siblings and so on. Tainting has very far reaching consequences, affecting others associated with you even though they are not doing any property trading themselves. Fortunately, any rental properties they hold at the time they become tainted won't be tainted, however, any rental properties they buy in the future, will be tainted, which means that they will have to pay tax on their capital gain if they sell them in less than 10 years.

Yes, you can avoid paying tax on the capital gain if you hold the property for longer than 10 years, but only if your intention at the time of purchase was to hold the property long term. If your intention at the time of purchase was to on-sell the property, it doesn't matter how long you own the property, you will have to pay tax on any gain you make. The other point to consider is that 10 years is a long time. In that time, a lot can happen - death, divorce, get into financial difficulties, become ill, or want to move to another country, for example. Expecting to hold onto a property for 10 years and never have a situation like that happen may be naive, not to mention dangerous.

You are far better off putting in place the right structures to ensure tainting doesn't occur. Under the proposed legislation, it won't matter what you do, you'll be tainted, even if you have in place the right structures. The majority of people currently put in place the right structures so that they pay tax on their property trading, and nothing on their buy and holds, so that they are being very clear about what their intention is in buying a property. This legislation has not yet been passed, and there has not been much of a public debate about the proposed changes, so watch this space.