IT'S a case of walking before they can even crawl for some very young property owners, with parents setting up their children for property ownership almost from the day they are born.Obtained from news.com.au
The far-sighted plan is more common in Europe than Australia but the same benefits apply. As Australian prices continue to rise and affordability worsens, child landlords are expected to become increasingly common here too.
Under Australian law, minors (anyone under age 18) can own property in their own name. So there is nothing stopping parents or family pooling their combined birthday and Christmas money for the kids and buying a property for them instead. What better gift than to have a home virtually paid off by the time they move out?
But there are some catches. The first is tax and the second is finding a seller willing to enter a contract with a minor including those so young they can't read or write.
According to tax expert Adrian Raftery of MrTaxman.com.au, income earned from the property will be taxed at the highest marginal tax rate because it will be classified as "unearned income" by a minor.
The maximum tax rate of 46.5 per cent applies to investment income such as rent received by a child, but this also means a greater potential benefit from negative gearing.
"Of course, the minor is entitled to the usual deductible expenses incurred while owning the property such as rates, strata levies, management fees and repairs," Raftery says.
"If they are able to borrow funds and negatively gear the property, then the interest can be claimed as well," he says.
In most cases, a minor can enter a contract and own a property, but the problem comes for the people on the other side of the contract as they can't enforce the contract if something goes wrong.
So anyone who enters a contract with a minor runs a greater risk that the child is not going to see it through. Unlike with an adult in a contract, the other party can't enforce the purchase or keep the deposit of the child.
Law firm Wisewould Mahony partner Julie Barkla says this stems from the principle that minors lack capacity to understand or enter certain arrangements and therefore can't be bound by them.Despite it being uncommon, children can own property, Barkla says, although there can be a few extra hurdles.
For example, most states require the date of birth to be noted on the certificate of title to show the owner is a minor. This is so future prospective buyers will know they are buying from a child and therefore the same enforcement issues arise with the contract. However, check each state's requirements.
For example, in Victoria, according to Barkla, a minor first needs to obtain a court order before a property registered to a child can be sold.
A contract for the repayment of money lent to a minor will not be binding on the minor.
"Potential financiers tend to shy away from the prospect of engaging in a legal stoush with a minor to recover money," Barkla says.
There are exceptions to this, she adds, which allow loan contracts with minors when they are members of a building society or co-operatives.
Another option could be a formal but private loan to the child from a family member or parent.
A popular method of buying property for a child is through a trust, says Thomsons Lawyers partner Eu Ming Lim, in which an adult parent or guardian holds the title to the property as trustee for a minor.
"The adult trustee will be able to deal with the property, for example by taking loans against it, but it will still be required to be dealt with and held for the benefit of the minor," Lim says.
However, with some trusts there can be capital gains tax to pay when the trust eventually transfers the property into the name of the child, such as when they leave home.
Another similar method is through a "bare trust".
"As with a discretionary trust, the trustee would purchase the property but the trust deed would state that the trustee holds the land absolutely for the benefit of the nominated child," Barkla says.
"When the property is later legally transferred into the name of the nominated beneficiary, in these circumstances there would usually be no stamp duty or capital gains tax implications for the child or the trust," she says.