Brightline rollover relief extended but still problematic

The Inland Revenue has released a special report on the enactment of changes to interest deductibility and Brightline tax rules. However this report, designed to assist taxpayers to understand and interpret the new rules, runs to 215 pages! So much for the Government’s commitment to ensure new rules minimise compliance costs. 

In this article we will cover off the changes to rollover relief, as it relates to Brightline tax.

Rollover relief from the Brightline tax has previously only been granted in very limited circumstances. These have included changes of ownership, following relationship property settlements and transfers following the death of a taxpayer, to executors and estate beneficiaries.

Rollover relief means the transferor is deemed to have disposed of the residential land at cost (rather than market value) and the transferee is deemed to have acquired the residential land on the date that the transferor acquired the land. In essence, this means the transfer of title is ignored for Brightline tax purposes.

New rules now have been legislated, in limited circumstances, to extend rollover relief to transfers of land in and out of family trusts. 

Rollover relief is now provided if: 

1. Each transferor or each recipient is also a beneficiary of the trust. 

2. At least one of those transferors or recipients is also the principal settlor of the trust 

3. Each principal settlor is a beneficiary of the trust and a close family associate 

4. Each beneficiary is either a close family beneficiary or trustee of another trust with at least one beneficiary that is a close family associate of a beneficiary of the first trust.

For rollover relief to apply when the trustees transfer the property back to its original settlers, each recipient’s proportional interest in the property has to be the same, as in the original settlement of the property on the trust.

Interestingly, relief is intended to be available when property is transferred back to the original owner and then settled on a new trust. So, rollover relief should apply to pure resettlements where the trustees transfer property to a new trust. However legislation to enable this is not included in the recently passed amendments. It is intended that rollover relief for these resettlements will be included in the next available tax bill. The wait therefore continues for those hoping to do a resettlement.

It appears that rollover relief will only exist where residential land is transferred to the principal settlor who previously transferred the residential land to the trust. This means rollover relief will not be granted where a settlor settles cash on a trust and the trustees have used this cash to acquire the residential property.

While we are pleased to see movement on addressing the unintended consequence of Brightline, with taxing transfers of land in and out of trusts, the amendments as they stand now are complicated, messy and limited in their scope. We can only hope the next round of changes will offer some further improvements to the mess we have now.