This article discusses the general tax principles relating to the settlement of relationship property in New Zealand, including the potential effect of the new ‘bright line’ test for residential property introduced on 1 October 2015.

1. A
lthough the tax implications of
relationship property settlements
are rarely front-of-mind, they can
have significant consequences. It is important
any tax implications are properly considered
and reflected in the agreement to achieve a
fair settlement. This article discusses the
general tax principles relating to the settle-
ment of relationship property, including the
potential effect of the new ‘bright line’ test
for residential property recently introduced
on 1 October 2015.
The general rule
For relationship property purposes, the
general rule is that the transfer of property
under a settlement of relationship property
does not trigger an income tax obligation.
However, that does not prevent an income
tax liability arising should the transferee
subsequently dispose of the asset.
This is different from the position in the
normal course of business, where the sale of
business assets will generally be treated as
a taxable event, triggering likely tax conse-
quences. This includes tax consequences on
business assets which are sold or realised prior
to the settlement of relationship property
with the intention of using those proceeds
in the settlement.
Relief from income tax for relationship
property purposes covers a range of assets
commonly used in business, including shares
and options, land, timber or timber rights,
patents, trading stock, livestock personal
property and leased assets.
While the transfer of property under a
settlement of relationship property does not
usually trigger an income tax obligation, this
does not mean any income tax obligation
relating to the property will be eliminated,
just that the responsibility will be transferred
to the new owner along with the property
and so effectively deferred to a later time.
On transfer, this means the new owner
acquires both the property and also its
tax-relevant characteristics. This includes
the transfer of the owners’ intentions at the
date of acquisition. For example, if ‘John’
purchased a classic car with the intention
of later resale, any subsequent gain on sale
made would be likely to be taxable. If this car
was then transferred to ‘Jess’ on separation,
she would not only receive the car but also
the ‘intention’, meaning any subsequent
gain on sale would remain taxable income.
The transferee essentially steps into the
shoes of the transferor, and so they should
be aware if any such intentions exist, prior
to agreeing to the asset transfer.
Who do (and don’t) the
concession rules apply to
To qualify for the relief described above, the
property transfer must be made under a set-
tlement of relationship property, involving the
parties to a relationship property agreement.
Currently, only married couples, the
parties to a civil union, or people in a de
facto relationship, are defined as parties
to a relationship property agreement. This
means that if your clients agree on other
options for dealing with their assets, such
as transferring property into a trust, the tax
concessions cannot apply (because the trust
is not a party to the relationship property
agreement).
This may create unintended tax conse-
quences. For example:
A couple decide to separate after 10
years together. They have entered into
a relationship property agreement and
agreed that the husband will transfer the
commercial property that was owned by
him personally to a trust settled by the
wife. The husband has claimed $50,000
in building depreciation (before 2011)
and the property has increased in value.
As the transfer to the trust does not
qualify as a settlement of relationship
property, the tax concessions that would
otherwise apply are not available. The
husband will have to declare $50,000 of
taxable income (depreciation recovered)
in the year of transfer.
To counter situations like this, amendments
have been introduced that will broaden the
circumstances when the concessions will
be available. These proposed changes are
contained in the Taxation (Annual Rates for
2015–16, Research and Development, and
Remedial Matters) Bill. The revised definition
of ‘settlement of relationship property’ is:
“a transaction under a relationship
property agreement that creates a
disposal and acquisition of property
between –
i. a person who is a party to the relationship
agreement or is associated with a party
to the agreement:
ii. another person who is a party to the
relationship agreement or is associated
with a party to the agreement:”
At the date of this article the bill has been
through its second reading, and so appears
likely to be passed in its current form. The
changes will take effect from enactment
with no retroactive change, so they will not
affect the financial position of anyone who
has previously settled relationship property.
Be aware of the bright-line
Recent changes to the tax rules made with
a view to dampening the strong Auckland
residential property market now mean that
where residential property that is not a
primary residence is sold within two years of
acquisition, any financial gains are generally
subject to tax at the owner’s marginal rate
of tax.
In particular, on 1 October 2015, what
is referred to as the ‘bright-line’ test came
into play to help tax authorities identify
residential property transactions that fall
into this category.
As explained, the transfer of property
under a relationship property settlement
is not currently considered a taxable event.
Accordingly, the transfers of property under
a relationship property agreement will not be
subject to a tax liability under the ‘bright-line’
test. The property is deemed to have been
transferred at cost and the original acquisition
date still applies.
However, any subsequent sale of the
transferred property may be subject to the
bright-line test, if it occurs within the two
year period from when it was purchased.
While this doesn’t apply to the main home,
it does cover any holiday homes or rental
properties.
The introduction of the ‘bright-line’ test
indicates the need to identify any residential
properties (other than the family home)
that have been acquired after 1 October
2015, as these could give rise to a potential
tax obligation following separation for the
party to whom the property is transferred
if held for less than two years.
There may also be a value impact on the
property for relationship property purposes
due to a reduced ability to sell the property
in the short term without triggering a tax
liability. This is particularly in situations
where one of the parties is forced to sell
the property due to their changed personal
circumstances. As such, where the sale of
the property appears likely or necessary
at the separation date, it may be that the
relationship property settlement reflects this
tax liability in some way or provides for some
form of tax warranty should a liability arise.
Summary
While the general rule is that transfers of rela-
tionship property do not give rise to a taxable
event, this does not mean tax implications
can be ignored. As the new “bright-line” test
on residential property demonstrates, tax
considerations can directly impact the values
at which relationship property is settled and
so should be carefully considered as part of
any settlement discussions.
Jay Shaw is a Partner at Grant Thornton.
He has 15 years’ experience in assisting with
the financial aspects of relationship property
settlements, including business valuations and
financial investigations. You can contact him
at jay.shaw@nz.gt.com.
DanLoweisataxassociateatGrantThornton.
He has significant tax consultancy experience
withaparticularfocusoneffectivetaxstructuring
including for relationship property purposes.
You can contact him at dan.lowe@nz.gt.com.
The ‘bright-line’ test and other
tax considerations in relationship
property settlements
JAY SHAW AND DAN LOWE
Financial issues
in relationship
property
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We can help.
Grant Thornton offers high quality, independent and clear financial
opinions that can help you navigate the complexity of your situation.
Contact:
Jay Shaw
Partner, Corporate Finance
T +64 (0)9 300 5804
E jay.shaw@nz.gt.com
www.grantthornton.co.nz
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