Bright Line Test Tax Articles

Bright Line Test (5): Family Trust and Main Home Exemption

We will continue to discuss the same topic as before – Bright-line test, with special focus on a family trust.

As always, let us record some assumptions for this article. John entered into an agreement to purchase a home in Auckland and the settlement is scheduled for May 2017. John is now meeting his lawyer and discusses, amongst others, the ownership issue. He has two children, one in Auckland studying economics and the other, staying in Dunedin, studying health science. John owns a home in Dunedin under a family trust, say, Harvard Trust. You can see one of his main issues to determine with his solicitor includes whether he can set up another family trust and settle the Auckland home on that family trust and allow the first child to stay in the house. Eventually, John wants to claim that the Auckland home is his (or his child’s) main home and, under the CB16 of the Act, further claims exemption as a main home.

It is important to quote the wording of the relevant section. The section reads:

CB16A Main home exemption

SCB6A does not apply to a person who disposes of residential land, if the land has been used predominantly, for most of the time the person owns the land, for a dwelling that was the main home for –

  1. A beneficiary of a trust, if the person is a trustee of the trust and
  2. A principal settlor of the trust does not have a main home; or
  3. If the principal settlor does have a main home, it is that main home which the person is disposing of.

You will note that, reading the entire section above, there are four elements John needs to meet for him to make a successful exemption claim for the Auckland home as his main home. They are 1) John (or one of the beneficiary including his child in Auckland) lives in the home most of the time, 2) John (or his child in Auckland) is appointed as a beneficiary under the Deed of trust; 3) the family trust, say Yale Trust, owns the home in Auckland at least two years from the date of purchase and 4) John, if the Harvard Trust disposes of the Dunedin home before Yale Trust disposes of the Auckland home, is not considered to be one of those “principal settlors” under the Harvard Trust as defined in the Act.

The next issue is what (or who is) is considered to be a principal settlor? CB16A(3) provides the answer. John is considered to be a principal settlor if he contributed most (or equally most) value toward the settlement of the Dunedin home, Harvard Trust. It does not matter whether John is named as a settlor in the deed of the Harvard trust or not.

It is also relevant to note that a purchaser is required to complete a tax statement since the introduction of the Bright line rules in 2015. One of the information required to complete the tax statement is the IRD number for the purchaser, whether individual or otherwise – the IRD number for the family trust in this instance. This follows that the family trust is required to obtain an IRD number and this is a separate question to claim as a main home, following that even if you provide the IRD number, that does not necessarily mean you are not eligible to claim main home exemption.

We are conscious that the audience of this article may include lawyers practicing on conveyancing matters. They will realize that there is a drop down menu for a lawyer to indicate whether the property is going to be used as a main home for the purchaser. The drop down menu under the LINZ workspace does not, interestingly, include a family trust. We, however, note that there was a clear contemplation on this point when the Bright line rule was introduced. The fact that there is no drop down menu in the LINZ work space does not necessarily mean that a family trust is not able to claim a main home exemption.

It is finally worthwhile to note that a deed of a family trust is an “internal document” in that you do not have to disclose the deed to a member of a public, unlike a company. This, to some people, may mean that they are attempted to amend the terms of the deed of the trust from time to time, to avoid tax liability. We advise that GB53 is designed to counter these actions as part of the avoidance schemes and there is a specific scheme called land-rich trust to cover these instances.

This article is designed to give general information to the audiences and readers of this article. This is not designed to provide a legal advice to a particular person of particular circumstance. If you have any enquiries, you should seek legal advice on that issue. A. B. Lawyers Limited does not accept any liability arising from misjudgment by the audience, without having independent legal advice on his/her case.

The writer advises that the Chinese translation, of the English version, is done by one of the office legal assistant. There may be occasions where you notice misinterpretation despite that we do our best to make the correct translation. If you notice that, it is much appreciated you let us know.