New Bright-line Rollover helps Trusts Wind Up

Published: 01 Jul 2022

Tui and Nigel have two residential rental properties in their family trust that they want to dissolve due to all the compliance obligations. The trust acquired one property 5 years ago (property A) and they gifted the other property (property B) to the trust 2 years ago.  Both properties have gone up in value since the trust acquired them. They want to know what the tax issues are if the trust is dissolved and the properties are distributed to them.

Firstly, you need to consider the normal land sale provisions that might apply ie was there any intention of resale for the property the trust actually acquired, secondly is there any "tainting" as a result of association with an entity in a land developing or building type of business and finally whether there has been any rezoning or changes in the district plan that has contributed to more than 20% of the profit.

Assuming none of these provisions apply the next issue is whether the bright-line rules apply. New concessional rollover provisions came in to force on the 1 April 2022 for certain transfers of residential property between trusts and settlors of those trusts.  The rollover only applies to transfers of property from trusts to individual settlors if the same individuals transferred the property to the trust in the first place. This means property A wont qualify for rollover resulting in the bright-line test period for the individuals becoming 10 years. However, for the trust the 2 year test period applied to this property which has now expired so there will be no bright-line income for the trust. Property B will qualify for rollover which means the trust will not have a bright-line income and the individuals will have the same bright line start date that the trust had. The bright-line test period is supposed to remain the same as it was for the trust ie 5 years. Unfortunately there is a mistake in the legislation which means the test period is reset at 10 years. IRD have indicated this will be retrospectively corrected in the next few months but it might pay to wait till that happens.

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