Summer 2015 Newsletter

Tax changes for settlements and the proposed “bright-line” test

With effect from 1 October 2015, there are new requirements around disclosure of tax information when buying, selling and transferring New Zealand property. There is also a new proposed “bright-line” test that will apply solely to residential land transactions to clarify and supplement the existing laws around taxation of property transactions.

The disclosure changes (which do not apply when the party is dealing with their “main home”) require parties to a property transaction to provide their IRD numbers, and where applicable, their taxpayer identification number from any overseas countries where they have to pay tax on their worldwide income.

Where a Trust is dealing with property, the IRD number to be supplied must be the IRD number for the Trust itself – not the trustees’ personal IRD numbers.

One effect is that entities involved in property transactions (other than in some specific exempt transactions, for example where the property sold satisfies the requirements of the “main home” exemption) will need an IRD number to complete the transaction. It is therefore advisable to consider the time it may take for you to obtain an IRD number when agreeing to timeframes in any property transaction.

Tying into the new disclosure requirements is the proposed bright-line test that will apply to residential property transactions entered into on or after 1 October 2015. This proposed test (which has not as yet been enacted and may be subject to changes before being passed) is intended to complement our current property tax rules.

The bright-line test is expected to require income tax to be paid on any gains made from the sale of residential property within two years of purchase. The current proposed exceptions are if the transaction relates to the “main home”, to a relationship property transfer, or to inherited property.

Under existing law, gains from the sale of land can already be taxed as income if that land was acquired for the purpose or intention of disposing of the land. This law remains unchanged, but has proved problematic for the IRD to implement as the IRD cannot always prove intention on the part of the taxpayer. The proposed bright-line test was introduced in part to resolve this problem for the IRD.

As the bright-line test is only intended to apply to residential land, there is also an associated definition of residential land. Residential land means land that has a dwelling on it, or for which there is an arrangement to build a dwelling, or bare land that is capable of having a dwelling on it due to its area and nature.

If you are involved in or anticipating entering into a property transaction in the near future it is important that you make sure you can comply with these new disclosure requirements and have considered the bright-line test and its potential effect.

 

Trust and relationship property – what does Clayton v Clayton mean for me?

Clayton v Clayton [2015] NZCA 30 (‘Clayton’) considers whether property owned by a particular Trust is relationship property for the purposes of the Property (Relationship) Act 1976 (‘the Act’).

Relevant facts

Mr and Mrs Clayton separated in 2006 after 17 years of marriage. During the marriage, Mr Clayton established a number of Trusts, including the Vaughan Road Property Trust (‘the Trust’). The discretionary beneficiaries of the Trust were Mr Clayton and Mrs Clayton, together with their two children, who were also the Trust’s final beneficiaries. The Trust Deed nominated Mr Clayton as the ‘Principal Family Member’, which conferred on him certain powers including: exclusive powers of

appointment and removal of trustees and beneficiaries, wide powers that permitted the Trustees to act contrary to the benefit of the Trust’s beneficiaries, and the power to distribute Trust assets to himself.

Family Court decision

The Family Court held that the Trust’s assets were relationship property for the purposes of the Act, as the Trust was “illusory”. It was held to be an illusory Trust because the powers conferred upon the Trustees hamstrung the ability of the Trust’s beneficiaries to hold the Trustees to account. This type of administration over the Trust was described as a “convenient structure for commercial purposes, carrying few hallmarks of a Trust”.

High Court decision

On appeal, the High Court also held that the Trust was “illusory” but for different reasons. The High Court held that the powers conferred on Mr Clayton were analogous to ownership over the Trust’s assets, allowing Mr Clayton to manage the Trust’s assets, as though the Trust itself did not exist. As a result the High Court held that the Trust’s assets were relationship property for the purposes of the Act.

Court of Appeal decision

On appeal, the Court of Appeal disagreed that the Trust was “illusory” and concluded that the Trust was valid. However, the Court considered the wide definition of property in the Act, which defines property to include “any other right or interest”. The Court held that Mr Clayton’s power to appoint and remove beneficiaries met that definition. As a result the Trust’s assets were relationship property for the purposes of the Act. The Court went on to hold that the value of Mr Clayton’s powers would be equal to the value of the Trust’s assets.

Practical implications

The Supreme Court is yet to deliver its judgement; however, the Family Court, High Court and the Court of Appeal all reached the same conclusion; that the Trust’s assets were relationship property for the purposes of the Act, but for different reasons.

The Court of Appeal’s decision means that Trust powers may now be possibly defined as relationship property for the purposes of the Act, despite being sheltered behind a validly constructed Trust.

While the implications of Clayton are fact specific, it is a current reminder of the critical importance of both effective asset planning and Trust drafting. Clayton compels those drafting Trust Deeds to carefully contemplate the nature and extent of Trust powers. If you think your situation may be effected by the decision of Clayton it is recommended that you seek professional legal advice.

 

Selling a business – things to consider

Why are you selling? Probably the most important question, this can affect how the transaction is structured and timing.

Finally, when do you need to sell? A common theme here is that there are many things you can do to make your business more attractive (and therefore more valuable and easier to sell), but they can take time. Seek advice early to ensure you are on the right track.

All information in this newsletter is to the best of the authors’ knowledge true and accurate. No liability is assumed by the authors, or publishers for any losses suffered by any person relying directly or indirectly upon this newsletter. It is recommended that clients should consult a senior representative of the firm before acting upon this information.

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McLeods Lawyers — 21 Hobson Avenue, Kerikeri, Bay of Islands, New Zealand — Phone +64 9 407 0170 — Email law@mcleods.co.nz

The information on this site is not comprehensive legal advice. Please contact us for advice and information suited to your needs.