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Blackburn Trustees and the Brightline Test #tax

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Presentation to Trusts Special Interest Group. The case between Blackburn Trustees and Crowe Horwath around Capital Gains Tax is a portent of the future for New Zealand tax.
Brightline test overview in this context and High Court decision by Terry Baucher, Baucher.tax

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Blackburn Trustees and the Brightline Test #tax

  1. 1. © Baucher Consulting Limited April 2019 All rights reserved. Blackburn Trustees and the bright-line test – the shape of the Capital Gains Tax to come Terry Baucher, Baucher Consulting Ltd
  2. 2. © Baucher Consulting Limited April 2019 All rights reserved. ➢ Capital gains tax (CGT) is on the way – what do we need to think about now? ➢ Blackburn Trustees v Crowe Horwath good example of issues involved in a CGT. ➢ Bright-line test involves many issues typical in a CGT, timing, valuation, record-keeping. ➢ Overview of bright-line test highlighting current issues and its relevance as preparation for any future CGT. Today’s presentation
  3. 3. © Baucher Consulting Limited April 2019 All rights reserved. GG and Blackburn Trustee Ltd v Crowe Horwath (NZ) Ltd (2018) 28 NZTC 23-053 During 2015 Mrs Blackburn began considering transferring several properties to the Blackburn Family Trust including a property on Waiheke Island. On 20 January 2016 Mr Smith of Gaze Burt, the trust’s lawyers, advised trustees that newly enacted bright-line trust could apply to future sale of Waiheke Island property. On 31 March 2016 Mrs Blackburn transferred ownership of Waiheke Island property to the Blackburn Family Trust at a purchase price of $2,850,000. “A right Brexit”
  4. 4. © Baucher Consulting Limited April 2019 All rights reserved. In March 2017 trustees in negotiation for sale of Waiheke Island property (Mr Smith of Gaze Burt on holiday) On 29th March director of trustee company sent trust’s accountant at Crowe Horwath following email: “FYI the offer has been up’d to $5 million for the Waiheke (sic) property. Will talk to the family about this but let me know your thoughts when you get a moment.” Blackburn Trustee (cont)
  5. 5. © Baucher Consulting Limited April 2019 All rights reserved. On 31st March telephone discussion between Crowe Horwath and trustee director regarding the sale. Accountant didn’t make any recommendations about the sale or potential tax implications. On 3rd April trust agreed to sell property for $5.2 million. Subsequently assessed by Inland Revenue under bright- line test. Trustees applied for summary judgement against accountant for $785,696.09 – the trustees’ tax liability and cost of professional advice. Blackburn Trustee (cont)
  6. 6. © Baucher Consulting Limited April 2019 All rights reserved. The High Court dismissed the summary judgement application. Associate Judge Osborne remarked: “On its own, the request made for “your thoughts” does not establish such a request [for tax advice] beyond argument. …This is not a finding that the Trust does not have a case in relation to the scope of the requested “thoughts”. Blackburn Trustee (cont)
  7. 7. © Baucher Consulting Limited April 2019 All rights reserved.
  8. 8. © Baucher Consulting Limited April 2019 All rights reserved. Blackburn Trustees - lessons ➢ Understand timing – slow pace of restructure. Could it have been completed prior to 1 October 2015? ➢ Valuations – 31 March 2016 valuation too low? ➢ Responsibility and communication. What was expected of Crowe Horwath? Role of lawyer. ➢ Factor tax into sale price (as for GST and compulsory zero-rating)
  9. 9. © Baucher Consulting Limited April 2019 All rights reserved. Bright-line test overview ➢ Section CB 6A Income Tax Act 2007 applies if NONE of sections CB 6 to CB 12 apply. Proposal is for CGT to catch transactions not already taxed. ➢ Initially applied to disposals of residential property if made within two years of when person’s FIRST interest in residential land is acquired on or after 1 October 2015. ➢ If first interest in residential land acquired on or after 29th March 2018 then disposals made within five years of that date will be caught.
  10. 10. © Baucher Consulting Limited April 2019 All rights reserved. Date of acquisition and disposal ➢ Date of acquisition is date title is registered ➢ Date of disposal is date a person enters into a contract to sell the property ➢ Using different relevant date for acquisition and disposal counters artificial deferrals of sales: ➢ In this example deferred registration would take property out of bright-line test
  11. 11. © Baucher Consulting Limited April 2019 All rights reserved. “It’s just a simple restructure” ➢ Prior to bright-line test restructures were a reasonably straight-forward process with few immediate tax consequences. ➢ With few exceptions (death, relationship property) no “roll-over relief” for bright-line affected transactions. ➢ Therefore very important to carefully plan restructures to ensure bright-line test either not inadvertently triggered or its consequences minimised.
  12. 12. © Baucher Consulting Limited April 2019 All rights reserved. Bright-line test - example 10 November 201730 October 2015 15 March 2017 Date registered Sale & purchase agreement signed Caught under test? Yes: sale & purchase agreement to sell signed within two years Date of settlement
  13. 13. © Baucher Consulting Limited April 2019 All rights reserved. Oops! – dealing with an unexpected tax bill ➢ If bright-line test applies and sale is taxable provisional tax may apply retrospectively. ➢ This is likely to be the case where the tax (“residual income tax” or RIT) exceeds $60,000 for the year. ➢ If RIT does exceed $60,000 then use of money interest at 8.22% will start running from the trust’s third instalment date (usually 7th May). ➢ Using tax pooling such as Tax Management New Zealand or Tax Pooling Solutions can mitigate impact.
  14. 14. © Baucher Consulting Limited April 2019 All rights reserved. Main home exception ➢ Under section CB 16A disposal not taxable if the land used “predominantly, for most of the time” of ownership as the person’s main home. ➢ “Predominantly” means more than 50% use. The exception applies in full or not at all, it does NOT apply on a proportionate basis. ➢ The main home exemption cannot be used if it has already been used twice in the two year period preceding the date of disposal, and also cannot be used by a person who has a regular pattern of buying and selling their main home.
  15. 15. © Baucher Consulting Limited April 2019 All rights reserved. Main home exception - trusts ➢ Where the property is owned by a trust the exception applies if the dwelling is occupied mainly as beneficiary’s main home for most of time owned by trust ➢ Property owned by a trust not eligible if a “principal” settlor separately owns a main home or is a beneficiary of another trust which owns his or her main home ➢ Principal settlor is person who has provided most value to trust by market value
  16. 16. © Baucher Consulting Limited April 2019 All rights reserved. Main home exception – trusts example ➢ Dave has two properties, a family home in Auckland in which he lives and a flat in Wellington that his daughter lives in while she is studying ➢ Dave settles the Wellington flat into a trust with his daughter as a beneficiary ➢ Trust sells flat a year later. Is the main home exception available? No. Dave is the principal settlor of the trust and has another main home
  17. 17. © Baucher Consulting Limited April 2019 All rights reserved. Main home exception - trusts ➢ Exemption for trust ownership in section CB 16A differs from that in CB 16. ➢ CB 16 exemption available for disposals under sections CB 6 to CB 11 if “the dwellinghouse was occupied mainly as a residence by…one or more beneficiaries of the trust.” ➢ Why change? CB 16A exemption seems to ignore current trust practice. ➢ UK exemption applies if it is “the only or main residence of a person entitled to occupy it under the terms of the settlement”
  18. 18. © Baucher Consulting Limited April 2019 All rights reserved. Main home exception - trusts ➢ Trustees and advisors will need to be constantly aware of who is occupying a property and periods of occupation. ➢ Much greater level of record-keeping required. ➢ Suggest obtaining and holding copies of any mortgage application made in relation to any trust property. ➢ Note the same definition as in section CB 16A is proposed for loss ring-fencing rules.
  19. 19. © Baucher Consulting Limited April 2019 All rights reserved. Bright-line test – the foreign dimension (1) ➢ Bright-line test applies to properties outside NZ. ➢ Properties outside NZ are probably subject to CGT in the overseas jurisdiction. ➢ Separate issue of beneficiaries/trustees becoming tax residents overseas. ➢ Australia treats a trust as Australian tax resident if ANY trustee is resident in Australia. ➢ UK will treat a trust as UK tax resident if both a trustee AND a settlor resident in UK.
  20. 20. © Baucher Consulting Limited April 2019 All rights reserved. Bright-line test – the foreign dimension (2) ➢ Distributions to overseas beneficiaries could be a means of reducing tax bill. For example trust has bright-line gain of $100,000 Tax as trustee income @33% $33,000 Distribute $25,000 to four non residents Tax on $25,000 = $3,395 each $13,580 Possible saving $19,420 ➢ Distributions to overseas beneficiary generally taxable in that jurisdiction. ➢ Australian residents may be able to use “temporary resident” exemption.
  21. 21. © Baucher Consulting Limited April 2019 All rights reserved. Bright-line test – the foreign dimension (3) ➢ UK will tax distributions of capital gains even if the gain was NOT taxable for NZ tax purposes. ➢ Recently client wanted trust to distribute part of proceeds of sale of family home to daughter in UK. ➢ Initial advice is that any distribution would be treated as a taxable chargeable gain so limited to annual CGT exemption £11,700. ➢ Worst case scenario NZ trust could have significant reporting obligations in UK. (The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017)
  22. 22. © Baucher Consulting Limited April 2019 All rights reserved. Residential Land Withholding Tax (1) ➢ RLWT applicable from 1 July 2016 to disposals that are subject to the bright-line test where the vendor is an offshore person ➢ Offshore person includes both individuals and non- individuals such as companies and trusts ➢ The vendor’s conveyancing agent will be the paying agent for RLWT purposes
  23. 23. © Baucher Consulting Limited April 2019 All rights reserved. Residential Land Withholding Tax (2) ➢ For a company to qualify for the non-offshore exemption ALL of following conditions must be met: ❖ The company must be NZ registered; AND ❖ ALL directors are non-offshore individuals; AND ❖ No more than 25% of shareholder decision making rights are held by offshore persons.
  24. 24. © Baucher Consulting Limited April 2019 All rights reserved. Residential Land Withholding Tax (3) ➢ A trust is an offshore person if ANY of the following apply: ❖ The trustee is an offshore person; ❖ The trustee has a co-trustee who is an offshore person; ❖ A settlor is an offshore person; ❖ All natural person beneficiaries are offshore persons; ❖ All beneficiaries and all discretionary beneficiaries are offshore persons; ❖ A beneficiary who is an offshore person has received a distribution from the trust within the last SIX years of a relevant distribution of residential land
  25. 25. © Baucher Consulting Limited April 2019 All rights reserved. Residential Land Withholding Tax (4) ➢ RLWT payable is the lesser of: ❖ 33% (or 28% if the vendor is a company that is not acting as a trustee) x (current purchase price – vendor’s acquisition cost); and ❖ 10% x current purchase price ➢ RLWT payable on 20th of month following month in which withholding obligation arises
  26. 26. © Baucher Consulting Limited April 2019 All rights reserved. Residential Land Withholding Tax (Example) ➢ Investor Co is an Australian company which purchased an investment property for $1.2m in October 2017. It subsequently sells property for $1.5m after spending $65,000 on renovations. Settlement is on 1 July 2019. ➢ RLWT lesser of ($1,500,000 - $1,200,000) x 28% = $84,000; or ➢ $1,500,000 x 10% = $150,000 ➢ RLWT is therefore $84,000, payable on 20th August 2019 ➢ Investor Co must file a tax return which will take into consideration the $65,000 renovation costs
  27. 27. © Baucher Consulting Limited April 2019 All rights reserved. ➢ The bright-line test is a precursor of the coming CGT. ➢ Record-keeping will become very important particularly around use of residences and valuations. ➢ Unintended consequences abound in bright-line test and will do so even more with a CGT. ➢ Important to keep in regular contact with clients, have clear lines of responsibility and be clear when advice required. Conclusions
  28. 28. © Baucher Consulting Limited April 2019 All rights reserved. “And remember, let’s be careful out there”
  29. 29. © Baucher Consulting Limited April 2019 All rights reserved. For further information please contact Terry Baucher 09 486 6200 terry@baucher.tax Follow me on Twitter @BCLTax

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