Tax Updates: 30 September 2024

Welcome to this week’s review of tax issues where Richard comments on what’s been happening in the world of tax over the past week. If you have a question or would like a second opinion on any national or international tax issues, please contact Richard via email at [email protected].

Bright-line rollover relief

Inland Revenue (IR) have just released a Questions We’ve Been Asked (QWBA) for comment, titled “How do the bright-line rollover relief provisions apply to transfers of residential land between associated persons?” The QWBA is referenced PUB00489, and will soon be joined by an updated version of QB 17/02 – “Income tax – date of acquisition of land and start date for 2-year bright-line test”, which is expected to be released prior to the finalisation of this QWBA.

If you are presently struggling to get your head around the new rollover relief provisions, which came into effect from 1^st July 2024, then I’d suggest that this 16-page doc is a must read for you.

The advantage of having the rollover relief provisions apply, is that:

• the transfer is treated as a disposal and acquisition for an amount equal to the transferor’s cost;
• the transferee’s bright-line start date for the land is the transferor’s bright-line start date; and,
• the transferor’s use of the residential land is attributed to the transferee in determining whether the main home exclusion applies.

The rollover relief provisions can apply in two scenarios:

1. There is a transfer of residential land between two persons associated with each other under any of the associated person tests contained within sections YB 2 to YB 13 of the Income Tax Act 2007 (ITA07). Now, when I say, “any of the associated person tests”, the more narrower association person tests, which apply for the purpose of the “land provisions,” do not apply, as the definition of “land provisions” does not include a reference to section CB 6A. So, if you can connect the dots and give the associated persons box a tick, then the remaining criteria to satisfy is that the parties must have been associated with each other for at least two years prior to the transfer date; or,
   
2. There is a transfer of residential land to a trustee of a trust in which all the beneficiaries (other than the transferor in their capacity as a beneficiary) are either associated with the transferor at the date of transfer, and for at least 2 years before that date, or a charitable organisation.

Note that rollover relief can apply to transfers of residential land only once in a 2-year period.

The QWBA goes on to explain each of the advantages of rollover relief in more detail. In this regard, you should note:

• Even if rollover relief applies to a particular transfer of residential land so that no bright-line gain is derived by the transferor (their income from the disposal (regardless of any actual consideration paid) is deemed to be their original cost plus any capital improvements, which provides a nil income amount therefore), the transferor is still supposed to file an IR833 – Bright-line residential property sale information form;
• Even though the transferee is deemed to have acquired the residential land for the transferor’s original cost, any capital improvements the transferee makes are then added to their “cost;”
• While rollover relief enables the transferor’s use of the residential land to be attributed to the transferee, where co-owners are involved on either side of the equation, you may then need to separately track the attributed use of each co-owner.

PUB00489 contains a number of useful flowcharts and examples to illustrate the commentary, and if you would like to make a submission on the draft QWBA, you must do so no later than 8^th November 2024.

This article was originally published through the ‘A Week In Review’ newsletter. If you would like to receive Richard’s tax updates every Monday morning, you can subscribe here.