By Nigel Jemson, Senior Manager, PwC
Last year, the Government extended the bright-line test to ten years for existing residential properties and remained at five years for ‘new build’ properties.
The extended bright-line test applies to properties acquired on or after 27 March 2021. An existing residential property acquired after this date will be taxable if sold within ten years of registration of title.
This is a significant change. Ten years is a relatively long period of time and circumstances can change.
It is important to be aware that changes in the property’s ownership will usually trigger a bright line tax liability if sold within the bright-line period.
Actions such as adding your partner onto the property’s title as 50/50 owners, transferring property to a company, or settling a property into trust can all trigger a tax liability.
Even when a property is gifted or transferred at cost to a related party, the tax rules deem the transaction to take place at market value. This can be a nasty surprise when there is no cash gain made to fund the resulting tax bill!
Fortunately, the Government has recently introduced ‘rollover relief’ rules in March which means that particular transactions between related parties where there is no effective change in economic ownership qualify for tax relief. These new rules have several benefits:
- This can allow some restructuring of your property holdings without triggering the bright-line test or extending the time during which your properties will be taxable under the bright-line test (i.e. avoids resetting the bright-line clock).
- Residential properties transferred at cost will not trigger a tax liability, overriding the market value rule noted above. If a property transfer qualifies for rollover relief, a residential property will retain its eligibility for partial interest deductions to be claimed (as only residential properties acquired prior to 27 March 2021 can continue to claim interest deductions).
Transactions that can qualify for rollover relief include:
- Settling a residential property into trust or transferring the property out of the trust to the original owners/settlors;
- Transferring a residential property to or from a look-through company (LTC) or partnership.
- Transfers of residential property between companies in a consolidated tax group.
There are some pitfalls to be aware of:
- For each type of transaction eligible for rollover relief, there are specific requirements to be met in order for the transaction to qualify for rollover relief.
- The rollover relief rules apply in limited circumstances and not all changes in economic ownership will qualify for rollover relief. For instance, a transfer of land to an ordinary company that is not a look-through company, or a distribution of property from a trust to a person who was not the principal settlor of the trust, would not qualify for rollover relief.
- If a related party property transfer is made at greater than cost, you would still be taxable on the net gain.
Finally, you still need to consider the impact of the other land tax rules. The land tax rules are complicated, and there are other circumstances where the sale of residential land will be taxable even if the bright-line doesn’t apply. If in doubt, seek tax advice!
Thanks again to Nigel Jemson from PwC for the content of the above article. Nigel is a Senior Manager at PwC (www.pwc.co.nz), and provides a full range of accounting, tax, and business services to leading global, national, and local companies and to public institutions.
