Bright Line Test Tax Articles

Bright Line Test (6): Family Trust and Main Home Exemption

In the last edition, we discussed the topic concerning “Family Trust and Main Home Exemption.” We will continue to do so in this edition.

The office of A. B. Lawyers Limited made a formal enquiry with the Land Information New Zealand (“LINZ”) and requested clarification on issues we raised. The questions we put forward included, first, whether a family trust can be used where an owner wants to use the home as a main home and claims main home exemption in due course. The second question was, if the answer to the first question is affirmative, why questions 14-18 in the LINZ workspace is designed for only natural persons, excluding a trustee of a family trust, and does not provide family trust as an option as a non-notifiable transferor. We have then received a response from the LINZ.

LINZ kindly clarified those issues raised by this office. Let us examine the details here one by one.

LINZ confirms that family trust is available to claim main home exemption if the requirements set out in CB16A of the Income Tax Act are all met.

What is the difference between those entities you can choose from the drop down menu (mainly natural persons in s156A of the Land Transfer Act 1952) in the e-dealing workspace in LINZ and those other entities that not on the drop down menu such as family trust? Those listed entities you can choose if you want to claim a main home exemption is waived from the obligation to obtain IRD number. Those other entities not listed on the drop down menu, including a family trust, are required to obtain IRD number and then, if the owner has actually used the home as its main home after the purchase of the home, then the owner can claim main home exemption afterwards. The fact that the owner is required to obtain an IRD number does not automatically disqualify the entitlements given under the CB16 and CB16A of the Income Tax Act 2007, neither under the Land Transfer Act 1952.

Some audiences may realize that it may become an issue – what if an owner, at the time of the purchase, advised the solicitor concerned to claim main home exemption in advance, thereby the owner was waived from the obligation to provide an IRD number. Then, let us further assume, the owner did not actually live in the home as its main home. Let us further assume that the owner just realize that the home is to be disposed of soon due to unexpected change of personal circumstances. Let us further assume that it turns out, that the owner has owned the property only less than two years by the time of the disposition of the home.

The above may give rise to several issues, depending upon the actual circumstances in each case. I will mention the most obvious issue. You will first see that, amongst other issues, the owner might face tax evasion allegation if there is a taxable gain from the sale because IRD may believe that the owner claimed main home exemption when the owner did not have any intention to live in the home as main home. In other words, if the owner is unable to rebut the claim from the IRD, the owner may have to further face penalties, in addition to the tax shortfall.

Again, let us look at the matter from a different angle. What if the owner owned the property less than two years since the acquisition of the property? The owner himself did not reside in the home while he owned it. The owner now plans to sell and enters into an Agreement for Sale and Purchase of Real Estate. It is important to recall that the owner/vendor must provide sufficient information to the purchaser or its solicitor to determine the residential land withholding tax implications. We will discuss on this in the very next issue.

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