Brightline rollover relief for trusts extended

When the latest Tax Act was passed in March 2022, it quickly became apparent that the brightline rollover relief for trusts was very limited in that it only applied to transfers of residential property between a ‘rollover’ trust and the original settlor, and then only if the settlor had settled the land on the trust in the first place.

This meant rollover relief was not available for a property the trust had purchased using funds the settlor had settled on the trust. This also meant there was no rollover relief for trust resettlements (where a trust is wound up and assets are directly resettled on to a new trust).

Rollover relief is important because without it a transfer of residential land to or from a trust that is not done at current market value, will be deemed to have occurred at market value, which often gives rise to taxable income (unless an exemption could apply such as the main home exemption).

These limitations with rollover relief have been addressed in the Tax Bill that was introduced on 30 August 2022. Specifically, it is proposed that rollover relief is available when a property is transferred from one trust to another trust, provided both trusts are ‘rollover’ trusts and either both trusts have the same beneficiaries, or all the natural person beneficiaries are either the same (or close family associates of a principal settlor of) as the transferring trust.

This change addresses the issue with resettlements however this proposed change is prospective and will only come into effect only once the Bill is passed into law which is unlikely to be until 2023.

It is also proposed that rollover relief is available when a property is transferred by a trust, so long as the trust is a rollover trust and the recipient of the transferred property is the principal settlor at the time that the trust transfers the land, and at the time that the trust originally acquired the land.

This change addresses the issue of cash being settled on a trust, rather than the property itself. It is proposed that this change be retrospective and will take effect from 27 March 2021, assuming that the Bill is passed into law in its current form.

The Tax Bill was withdrawn last week in light of the Government’s flip-flop around introducing GST on KiwiSaver and fund manager fees, however it is expected that these additions to the rollover relief rules will be re-introduced once the Bill has been amended to reflect the Government’s decision not to proceed with imposing GST on KiwiSaver and fund manager fees.

In the meantime, and notwithstanding that some of the legislative changes are meant to be retrospective in nature, we would recommend holding off any proposed transfers to or from your trust until the rules have been finalised and passed into law.

If it is not feasible to wait for the rollover relief on trust resettlements to be passed, an option could be to transfer the property back to the original settlor who then resettles the property into the new trust (so long as both trusts are rollover trusts).

Given the complexity of the brightline test and rollover relief, we recommend you seek specific advice from your Nexia advisor before proceeding with any transfers.