Bright line changes - rollover opportunities for certain family trusts

The Taxation (Annual Rates for 2021-22, GST, and Remedial Matters) Act was given Royal Assent on 30 March 2022. The Act came into force on the day on which it received Royal assent save for provisions which are specified to come into force on a specified date.

The Act amends the Income Tax Act 2007 in relation to the bright-line test for residential land and the main home exclusion for disposal within 10 years. The bright-line property rule provides that if you sell a residential property that you have owned for less than 10 years (or 5 years for qualifying new builds) you may have to pay income tax on any gain on the sale.

The change eagerly awaited, is the change to when the acquisition date for the bright-line test for certain family trusts will deem a property to have been acquired. The effect of the change is a rollover of the acquisition date from the original owner of the land to the new owner when calculating the bright-line period for transfers of residential land to and from qualifying family trusts...Transfer to trustee

For anyone who now transfers land to a trustee on a “rollover trust” on or after 1 April 2022, the bright-line acquisition date for the trustee would be the date that the settlor obtained the land before the transfer to the trustee. The advantage of this is that if a settlor of a trust transfers their land to a trustee from 1 April 2022, the bright-line acquisition date (the date that the 10 year or 5 year period is calculated from) would be the earlier date when the settlor of the trust acquired the land, not the later date when the trustee acquires the land from the settlor. This means that the bright-line 10 year period (or 5 year period depending on the circumstances) does not reset on the transfer from the settlor to the trustee. This creates a great opportunity for persons who have been waiting to transfer their land to a trustee of a trust but did not want to have the bright-line period restart on the transfer to the trustee.

Transfer to original settlor

If an original settlor has the land transferred back from a trustee to the original settlor on or after 1 April 2022, and the trust is a “rollover trust”, when the settlor disposes of the land the bright-line acquisition date for the land is when the trustee acquired the land before the transfer to the settlor. The advantage of this is that if a trustee intends to transfer the land back to the original settlor of the trust from 1 April 2022, the bright-line acquisition date (the date that the 10 year or 5 year period is calculated from) would be the date that the trustee of the trust acquired the land, not when the settlor re-acquires the land from the trustee. This means that the bright-line 10 year period (or 5 year period depending on the circumstances) does not reset on the transfer from the trusteeto the settlor. If a trustee is looking to transfer the assets of the trust and wind up the trust, the land held by the trustees may be transferred back to the settlor (if the trust deed permits) and the bright-line period does not reset on the transfer from the trustee to the settlor.

Rollover Trust

Only certain family trusts qualify under the changes. The trust must meet certain criteria to fall within the meaning of a “rollover trust”. A "rollover trust” is defined in the amendments to the Income Tax Act and include two further defined terms namely “close family associates” and “close family beneficiary”. Your existing trust or the trust you intend to establish (as may be applicable) must qualify as a rollover trust to utilize the rollover bright-line acquisition date.

... With change comes opportunity

The changes create potential opportunities to property owners to change their ownership structuring and move their property as may be required without the acquisition date for the bright-line date resetting. While this is beneficial, one would still need to be careful not to trigger any income tax obligations under the bright-line period when effecting such transfer.

Contact our offices to assist you in determining what opportunities are available to you based on your individual circumstances.