- If you rent your family home to yourself
- Living temporarily in a property owned by your LAQC, company, partnership, trust or LTC
- Living with your tenants in a property owned by your LAQC, company, partnership trust or LTC
- If you set up an LAQC or LTC for asset protection
Problems arise when an LTC or LAQC buys an LTC or LAQC shareholder’s family home, and shareholders continue to live in the home and claim deductions (such as interest, insurance, rates and maintenance) for the property. In most instances this is considered tax avoidance.
You may believe that if you continue to pay market rent to the company you can continue to claim these LTC or LAQC losses against your income. However, we may still consider the arrangement to be tax avoidance.
The same principle applies if a similar structure is used such as a company, partnership or trust.
The problem arises when a structure (eg company, partnership or trust) is set up which enables an individual to rent their family home effectively to themselves. The individual or their family then continue to live in the home and claim deductions (such as interest, insurance, rates and maintenance) for the property which would otherwise be private expenditure.
For more information about private homes held in LAQCs:
From time to time a shareholder will move into a home owned by their LTC or LAQC which they had previously rented to tenants. There may be good reasons why they do this. For example:
- inability to find tenants
- relationship breakdown
- relationships formed with tenants
- renovating or building your own home.
But, if you live in the property and you’re a shareholder, you generally cannot continue to claim what would otherwise be private expenses, as outlined above.
Whether or not this structuring and claiming of resulting losses is considered tax avoidance depends on a number of factors. For example, whether the arrangement is permanent or temporary, and whether there are commercial factors driving the decision to live in the property.
We look at these arrangements on a case-by-case basis, but in many situations they may be regarded as tax avoidance.
The situation about tax avoidance is less clear when both a shareholder/owner and other tenants live in a home owned by an LTC or LAQC. We consider the proportion of expenses attributable to the shareholder/owner is not deductible. We will look at these arrangements on a case-by-case basis.
Some people claim the main reason for holding their personal residence in a limited liability company is for asset protection rather than the tax minimisation benefits.
In reality, these structures provide little or no asset protection. For shareholders to make use of LTC or LAQC losses, they must hold the shares in their own name. Because the shares of an LTC or LAQC company that owns residential investment property are equal to the market value of the property and represent an asset to the shareholder, less the mortgage, a creditor claim equal to the current value of the property is possible.
We will take a close look at the reasons for this arrangement, but we will generally disregard the asset protection argument when considering whether an LTC or LAQC arrangement is tax avoidance.
So, if you’re considering setting up an LTC or LAQC to own your family/private home for tax loss claim purposes, be aware that we consider these types of arrangements to be tax avoidance.
If you’re moving into a property owned by your LTC or LAQC over the long-term, consider taking the home out of your LTC or LAQC.
If you’re moving into a property owned by your LTC or LAQC on a temporary basis, be careful that you don’t claim a deduction for what would usually be considered private expenses for the period you’re in the home.
We strongly recommend you talk to a tax professional with expertise in this area if you’re considering any of the above arrangements.
Date published: 30 Mar 2011