As the son does not own the family farm, he has had difficulties negotiating funding with his bank because of his mother’s life interest.
His mother agrees to surrender her life interest in the family farm during her lifetime, to enable the legal estate in the family farm to be passed to her son.
Stamp duty on the transfer of mum’s interest to the son is exempt under the inter-generational stamp duty exemption for primary production land.
The family farm is transferred to the son and the family is happy.
Are there any tax consequences of the release of the life estate?
The mother’s surrender of her life interest constitutes a capital gains tax event and a market value is attributed to the mother’s surrender of her life interest. That gain must then be included in the mother’s taxable income for that tax year.
As the son has paid nothing for the land, the mother will need to find the money to pay the capital gains tax on the deemed gain on the disposal of her life interest.
The family particularly mum, are no longer happy.
Unfortunately, in this situation, it may have been better for the son to wait until the mother’s death so that the ATO would disregard any capital gain on the death of a life tenant.
Transfer of farming assets between family members is complex and professional advice should be sought.
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