Blackburn Trustees and the Brightline Test #tax

© 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

➢ 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

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”

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)

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.

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 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)

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.

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

“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.

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

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.

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.

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

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

➢ 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”

➢ 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.

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.

➢ 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.

➢ 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)

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

➢ 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.

➢ 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

➢ 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

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

➢ 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

“And remember, let’s be careful out there”

For further information please contact Terry Baucher
09 486 6200
terry@baucher.tax
Follow me on Twitter @BCLTax

Blackburn Trustees and the Brightline Test #tax

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