Rollover relief - Does it go far enough?
Residential property acquired after 27 March 2021 is subject to a 10-year bright-line period, or 5 years if the property qualifies as a ‘new build’. The extension to 10 years has increased the likelihood that a property transfer will be caught.
In an attempt to alleviate the risk that related party transfers would be unfairly taxed, some rollover relief was enacted on 30 March 2022 as part of the Taxation (Annual Rates for 2021–22, GST, and Remedial Matters) Act 2022 and applies to disposals of land occurring on or after 1 April 2022.
The legislation is complex and attempts to cater for numerous factual situations, but at a high level, the rollover relief provisions allow residential property to be transferred at cost, rather than deemed market value, resulting in no taxable gain on the transfer. Further, such a transfer does not restart the “bright-line clock” – the acquisition date under the bright-line provisions for the recipient would be the original acquisition date of the related transferor.
Where residential property is transferred to a family trust, rollover relief will apply in the following circumstances: each transferor of the land is also a beneficiary of the trust and at least one of the transferors of the land is also a principal settlor of the trust, and each beneficiary who is not a principal settlor is one of the following:
• within four degrees of blood relationship with, or married to, or in a civil union or de facto relationship with, a beneficiary who is a principal settlor,
• a company where a 50% voting interest is owned by a family member beneficiary,
• a trustee of another trust that has a beneficiary who is also a family member beneficiary of the test trust, or
• a charity.
Rollover relief will likely only apply to transfers of residential property from a family trust (where the beneficiaries are as outlined above) to a principal settlor of the trust. Given that the rollover relief is intended to apply where the economic ownership of the property has not materially changed, transfers of residential land to or from look-through company's (LTC) and partnerships may also qualify for rollover relief. However, this only applies where each person transferring the land has the same economic interest before and after the transfer.
Rollover relief will also apply where transfers of residential land take place within a wholly-owned tax consolidated group of companies.
Given that the ‘Bank of Mum and Dad’ is now NZ’s 5th largest home loan lender, these concessions do not go far to help the many who have their property partly or wholly held by their parents or a family Trust. Where a family trust wishes to transfer ownership of its property to a ‘child’ beneficiary, rollover relief will only apply if the child is also a principal settlor of the Trust – a scenario which would be few and far between.
For parents who own a house directly 50/50 with a child, the parent’s transfer of their 50% to the child would not be eligible for rollover relief at all, and hence it would be a case of waiting out the bright-line period to avoid any inadvertent and potentially material tax bills.
The PKF Dunedin Team
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