Trusts and Taxation: Rumours and Realities. September 2017

Transcription

1 Trusts and Taxation: Rumours and Realities September 2017

2 Trust Tax Rumours 1. Trust Distributions 2. Credit Current Accounts 3. Family home and subdivisions 4. Trusts holding GST and non GST assets 5. Holiday lets and GST 6. Complying/Foreign trusts 7. Trustee s liability for tax 8. Emigration of settlors 9. PRA transfers 10. Estate distributions

3 Distributions - the rumour IR are looking at beneficiary credit current accounts. If the amounts are retained for some time, IR will consider whether the earlier distribution of beneficiary income is a tax avoidance arrangement

4 Distributions - the reality Mentioned in QB 15/11 Scenarios on Tax Avoidance: Use of a Discretionary Trust Scenario is where the trustees pay or vest income to a beneficiary and the beneficiary is either: an individual adult beneficiary who is taxed on the beneficiary income at the lowest marginal tax rate, or a corporate beneficiary (that may or may not be solvent) with total tax losses available in that year equal to, or greater than, the beneficiary income

5 Distributions - the reality Minor beneficiary rules QB 15/11 have the trustees in commercial and economic reality distributed income to a beneficiary timing of addition and removal of beneficiaries how and when income is distributed any facts that indicate that the trustees have retained the use and benefit of the income any facts indicating whether there is a realistic prospect of beneficiaries ever benefitting from the income

6 Distributions - the reality Follow the money As part of annual trust review, look at longstanding credit current accounts IR more likely to look at distributions to loss entities than individual adult beneficiaries

7 Distributions - the reality How is the beneficiary entitled? If appointed, before 31 March? What factors considered in determining whether to benefit the beneficiary Any previous debt forgiveness? Avoidance issues: Will tax loss entity generate further income? Consider previous distributions Benefit of a distribution? Cash paid out

8 Credit current accounts the rumour IR regard a beneficiary with a credit current account as not creating a settlor relationship

9 Credit current accounts the reality PUB00209 draft ruling concluded credit current account only creates a settlor relationship if there is a loan agreement Working for families purposes have to bring in trust income but divide between no of settlors Settlor definition includes the provision of financial assistance Saunders v Vautier

10 Credit current accounts the reality Taxpayer submissions: this would affect settlors for other purposes IR not proceeding with PUB00209 Govt tax policy work program: There are instances when beneficiaries of trusts who leave their beneficiary income in the current accounts with the trust become inadvertent settlors. This is not in accordance with the policy intent.

11 Family Home and Subdivisions - the rumour Trustees who own the family home (say, for five years) subdivide off the back section and sell it are not liable for income tax on any gain on sale of the new section

12 Family Home and Subdivisions - the reality Section CB 12 Brings to tax any undertaking or scheme involving the development or subdivision of land begun within ten years where the development or division work is not minor There are four exclusions: residential land, business premises, farm land and investment land

13 Family Home and Subdivisions - the reality Section CB 17(1) contains the residential exclusion from CB 12: it applies if the work is for the use in and for the purposes of the residing on the land of the person or any member of their family living with them Section CB 17(2) is a separate and second exclusion to CB 12 which requires the land to be occupied by the person mainly as residential land for themselves and a member of their family living with them

14 Family Home and Subdivisions - the reality A trust cannot access the CB 17 exclusion as a non natural person such as a trust cannot occupy land as a residence Residual property should be able to be protected from CB 12 applying if certain criteria followed Options for the trustees

15 Trusts and GST the rumour A GST registered trust acquires a non GST asset and the new asset is automatically brought into the GST net

16 Trusts and GST the reality Can have a trust holding GST and non GST assets without tainting the non GST asset For example, commercial real estate and residential rental Need to ensure non GST asset retains its exempt activity status On sale of the non GST asset take care in the documentation

17 Trusts and GST the reality Can have a trust holding GST and non GST assets without tainting the non GST asset For example, commercial real estate and residential rental Need to ensure non GST asset retains its exempt activity status On sale of the non GST asset take care in the documentation page 1 declaration

18 Holiday Lets and GST the rumour Holiday lets owned by trusts can be at risk of adverse GST implications

19 Holiday Lets and GST the reality A supply of accommodation in a dwelling is exempt from GST The definition of dwelling in the GST Act was changed in April 2011 from a place used predominantly as a place of residence to mean a person s principal place of residence

20 Holiday Lets and GST the reality Therefore a holiday home that is let on a short term basis will not satisfy the updated definition of dwelling, not being a person s principal residence (the trust or the holiday renter) May also satisfy the definition of a commercial dwelling If either case applies, the supplies will be taxable supplies and if the Trust is already GST registered for some other taxable activity, the holiday house is dragged into the GST net

21 Holiday Lets and GST the reality If the Trust is not presently GST registered, determine the level of supplies, being the rent and deemed supplies to associated persons (at market value) per section 10(3) GST Act If supplies exceed the GST threshold: the actual and deemed rent is subject to GST claim GST on expenses; and a GST liability arises on sale

22 Holiday Let Example 1 A trust owns a holiday home and the family home, the beneficiaries use the holiday home when they can and do not pay rent This is not a taxable activity because there is no supply for a consideration. No GST issues

23 Holiday Let Example 2 A Trust acquires a holiday home in 2010 and lets it occasionally and generates rent of $20,000 for the year. Deemed supplies to associated persons calculated at $45,000 p.a The holiday let is a taxable supply, and as the total value of supplies exceeds the $60,000 GST registration threshold have to register for GST What about GST input tax claim or other options?

24 Holiday Let Example 2 Able to claim a GST input claim as at 1 April 2011 (based on original cost) if the change in definition has caused the change to a taxable supply; or Can elect out of the GST net if holiday home acquired before 1 April 2011, and the only reason the holiday house is in the GST net is due to the change in definition of dwelling, and supply of accommodation is less than the registration threshold (section 21HB)

25 Holiday Let Example 3 A trust acquires a holiday home in 2015 which is let short term and rent is under $60,000 pa. Subsequently the Trust acquires a commercial property and registers for GST The holiday home is now in the GST net: GST must be accounted for on the holiday rent. Can claim a GST change in use based on original cost under the new adjustment rules. Can t elect out. GST must be accounted for on disposal.

26 Holiday Let and GST the reality Depending on the circumstances a trust may still be entirely appropriate Understand the use and address potential GST consequences Also have to address potential income tax issues mixed use asset rules in particular

27 Complying / Foreign trusts - the rumour A NZ trust can be both a complying trust and a foreign trust, but the trust is subject to the foreign trust disclosure rules

28 Complying / Foreign trusts - the reality A NZ trust established by a non resident which satisfies its NZ tax liabilities and has no foreign sourced income as trustees income Arguably should be treated as a complying trust under the Income Tax Act Regarding foreign trust disclosure rules there are different views

29 Complying / Foreign trusts - the reality Tax Administration Act foreign trust disclosure requirements quite onerous Explaining to non residents who acquire a NZ property in a NZ trust for asset protection purposes IR Interpretation Statement on trust taxation hopefully will address

30 Trustees liability for tax the rumour Trustees are personally liable for the trust s GST and income tax whilst a trustee until the date they inform IR they have retired, and trustees are liable for the trust s income tax only for the income year prior to the date they resign

31 Trustees liability for tax the reality GST trustees are personally liable, and joint and severally liable. Section 57(3) GST Act - liability arising whilst a trustee remains, even following resignation. Section 57(3B) GST Act - IR will treat person as a trustee until IR receives written notice of resignation

32 Trustees liability for tax the reality Selkirk v McIntyre (2013) HC Mr Selkirk a solicitor trustee sought to be indemnified by his co-trustee for earlier settled proceedings for a trust liability for GST HC confirmed trustees personally liable for GST; liability is joint and several; creditor can pursue any one of them; who can seek a contribution or indemnity from cotrustees HC held entitled to a 50% contribution to the liability and costs; but no full indemnity in a passive trustee situation

33 Trustees liability for tax the reality Trustees are personally liable for the trust s income tax liability as if it was their own income (sections HC 2 and HC 24) IR s recent Trust Taxation Draft IS says notification to IR required for income tax to relieve liability!? IR refer to Case 5/2013 and say that in practice a trustee is only liable for income tax for the tax period prior to resignation So resign in September 2015, only liable until 31 March 2015

34 Trustees liability for tax the reality S and S v XYZ Limited (2016) HC: a person cannot be liable for taxes incurred by earlier trustees Notification to IR is not provided for, and a trustee is liable for income tax up until date of resignation, not sure about income year preceding resignation

35 Emigration of settlors - the rumour If all settlors of a NZ complying trust emigrate from NZ, the trust is likely to become a non complying trust if the trust continues

36 Emigration of settlors - the reality If the trust becomes a non complying trust the ordering rules apply to distributions and a distribution that includes accumulated income and capital gains is taxed at 45%

37 Emigration of settlors - the reality Problem solved if: one settlor remains a NZ resident; or the trustee does not derive foreign sourced income; or distributes foreign sourced income as beneficiary income; or Wind up trust before emigrate, preferably previous income year

38 Emigration of settlors - the reality New provision from 2016 backdated to the 2008/9 income year allowing trustees to elect for the trust to remain a complying trust (section HC 33) Note always consider tax laws of new jurisdiction

39 Trusts and PRA s the rumour Assets transferred to or from trusts by one or both of the spouses or de facto partners will get the Property Relationships Act tax concessions

40 Trusts and PRA s the reality Law change effective 24 February 2016 Prior to 2016 only transfers of property owned by the individual parties to the relationship agreement could access the tax benefits if the property was transferred under a PRA

41 Trusts and PRA s the reality Tax concessions include: no breach of shareholder continuity for tax losses or imputation credits, no depreciation recovery, no income on transfers of revenue account property maintenance of land acquisition date for transferee

42 Trusts and PRA s the reality Therefore, with properly completed PRA, the tax concessions apply to transfers to and from the individuals to persons or entities associated with them Will include trusts of which they are settlors or companies in which they own 25% or more of the shares And include transfers from associates to associates

43 Estates and roll over relief the rumour If an investment property is left by will to the deceased s spouse or close relatives, on death there is a roll over relief from the tax that would arise on depreciation recovery income

44 Estates and roll over relief the reality There are two transfers of property in an estate; the first a transmission to the executors or administrators; the second is a transfer from the executors to the beneficiaries Part FC of the ITA Act Standard rule is market value disposal on death, but exception for spouse or de facto

45 Estates and roll over relief the reality If all of the deceased s estate left to surviving spouse or de facto there is a roll over at stage one and stage two Therefore no tax implications on death or distribution Does not apply if a person who is not a close relative also receives property that is tax base property

46 Estates and roll over relief the reality If surviving spouse leaves tax base property to children, there is no roll over relief on death, therefore a market value disposal on death and potential income arises such as depreciation recovery There is roll over relief at stage 2 of the transfer to the beneficiary so no income for the executors

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