Inland Revenue (IR) has issued IS 23/02, which is to provide guidance to us all on the Commissioner’s view of how the 5-year bright-line test contained within section CZ 39 (so not section CB 6A which applies to post 27th March 2021 transactions) of the ITA07, should apply to specific family and close relationship transactions.
The IS has its focus on three specific transactions:
- parents to their child to assist the child with buying their first home,
- one partner to themselves and their new partner; and,
- all the beneficiaries who inherit the land under a will or rules of intestacy to some of the beneficiaries.
The commentary begins with a discussion surrounding the requirements of section CZ 39, which will trigger a bright-line tax exposure if all elements are satisfied. Some key points in this regard (and remember here that we are discussing family and close relationship transactions):
- When determining which bright-line rules may apply to you, you first need to check what law applied when you acquired your first interest in the land (usually when you signed the sign and purchase (S&P)). So, if your first interest in the land occurred on 28th February 2018 with settlement on 4th April 2018, you would be subject to the 2-year bright-line test, not the 5-year test. Having determined the relevant bright-line test, your bright-line period is applied, usually commencing with the date of land title transfer to you and ending on the date you sign an S&P to sell.
- Don’t overlook the pecking order of the land tax rules contained within subpart CB. Bright-line only becomes applicable once sections CB 6 to CB 12 do not have an application.
- The making of a gift or a distribution by your family trust to one of your kids as a beneficiary of that trust, counts as a disposal for land tax purposes.
- Unless roll-over relief applies, it’s very likely in these types of transactions, that a market value consideration will be deemed to apply, regardless of what amount you decide to charge the kids – either under section FC 2 (gifts and trustee distributions) or the anti-avoidance rules contained within section GC 1.
- Remember that due to the application of section CB 23B, the land tax rules can apply both to the whole land or a part of that whole land – so land held as tenants in common, for example, could be taxed differently upon disposal, depending upon each “tenants” individual circumstances, surrounding their particular interest in the land.
In a nutshell, and so you don’t need to read the entire 50 pages (you’ve left all the hard work to me), be on notice that you’re likely to have a bright-line tax exposure in relation to the following transactions:
- a disposal from parents, as individuals, to their child,
- a disposal from a company (which is not a look-through company), where the parents are shareholders, to their child,
- a disposal from parents, who are the trustees of a trust, to their child who is a beneficiary of the trust,
- a disposal from one partner to themselves and their new partner, to the extent of the new partner’s share in the land,
- a subsequent disposal from the two partners to a third party; and,
- a disposal from beneficiaries under a will or rules governing intestacy to a third party to the extent that the disposed interests do not equate to (is not the same as) the original shares acquired under a will or rules of intestacy.
On the other hand, you are unlikely to face a bright-line tax exposure when the transaction involves:
- a disposal from parents who are nominees or bare trustees for their child to their child,
- a disposal from a person who dies to an executor or administrator,
- a disposal from an executor or administrator to the beneficiaries under a will or rules governing intestacy,
- a disposal from some of the beneficiaries under a will or rules governing intestacy to the other beneficiaries; and,
- a disposal from beneficiaries under a will or rules governing intestacy to a third party to the extent of their original shares in the land acquired under the will or rules governing intestacy.
Finally, IS 23/02 includes numerous examples to illustrate the Commissioner’s interpretation of the potential application of section CZ 39 to family and close relationship transactions.