In the majority of the cases banks require the loan to be gifted. To satisfy the bank Mum and dad sign a deed of gift, yet the understanding at times can be that the amount is still a loan.

If a few years later the daughter and her husband separate, the intention of daughter and her parents is to deduct the value of the loan from the value of the equity in the property and other relationship assets. However, the daughter’s husband might make a claim that this was a gift as opposed to a loan and therefore should be included as part of the relationship property.

For an advance to be a gift, the donor must fully intend as such. Family arrangements are often informal and without a clear or settled plan. In circumstances where property is transferred from parents to children, there is the presumption at law that the transfer is a gift (due to a moral duty to provide).

There have been a few cases dealing with this very issue as to whether the payment is an advance or a gift. It is always best if documentary evidence exists to support the gift or a loan.

Whilst the lack of documentary evidence does not in itself mean that the advance is a gift, as was evident in Zhang and Li v Li, to prevent issues from arising down the track, it is best that payments are documented either as a gift or a loan, depending on what the intention of the parties were at the time the advance was made.

MINI BUDGET AND TAXATION OF LAND

The Government’s Mini Budget contains proposals to reduce the Brightline Test from 10 years to 2. Whilst no legislation has been introduced just yet, the understanding is that the 2-year Brightline Period will apply for land disposed of after 01 July 2024. The Budget also proposes to remove the deduction for commercial property depreciation. These are expected to become law in 2024. The Government has indicated that the deduction for interest on residential rental property will be phased back in, as opposed to being reinstated in full from 1 April 2024.

 

Increase to FTC and BSTC

Effective 01 Apr 24 the FTC (Family Tax Credit) and BSTC (Best start tax credit) will be increased in line with inflation as follows:

 

• FTC increasing the eldest child rate from $7,121 to $7,524 and the subsequent child rate from $5,802 to $6,130; and

• Best Start tax credit from $3,632 to $3,838.

 

15 January 2024

Please do not forget, 2^nd instalment of provisional tax and GST for the period ended 30 November 2023 are due on this day.

 

IS YOUR TRUST STILL FIT FOR PURPOSE?

Since early in 2021 when the Trust Act 2019 came into force, we have reviewed many of our Trust structures. The reason for the review was two fold.

 

First to ensure that the Trust Deed complies with the requirements of the new Act and where appropriate amendments were made to contract out of the various default duties that would otherwise give rise to unintended consequences for the Trustees who often are mum and dad with their professional advisor.

The second reason for the review was to assess whether the Trust is still relevant. NZ residents historically have made considerable use of family trusts, not necessarily for tax purposes but for asset preservation and passing these assets down to future generations. With time, the family circumstances and relationships within the family may change and the Trust may not adequatelly cater for those changes. In many instances simple amendments to the Trust Deed by Deed of Variation are needed to update the deed or remove/add beneficiaries.

 

In some cases variations cannot happen and perhaps a resettlement may be a better option. Tax issues can arise with resettlements (such as loss of imputation continuity) and therefore the options that are available should be carefully considered. Whilst the administration of Trusts has become more challenging and administratively intensive, there can be compelling reasons why a Trust Structure is to be retained and equally why a Trust structure should be wound up and assets returned to the Settlors.

 

With the recent changes to Income Tax Legislation, Trusts with residential properties can be wound up and residential properties transferred to the Settlor without triggering or resetting the brightline date, provided that the Trust qualifies as a Roll Over Trust.

 

Likewise transferring residential property from the Settlor to the Trust is possible without triggering or resetting the brightline date, provided that the Trust qualifies as a rollover trust.

 

If the Trustees of the Trust are considering relocating to Australia, certain steps must be taken to prevent the Trust from being inadvertently caught up within the Australian Tax net. Given the number of young adults mirgrating to Australia NZ settlors hould beaware that a distribution from a NZ trust to an Australian resident will be taxable (apart from corpus) whereas an inheritance is not taxable in Australia.

 

DISTRIBUTIONS FROM FOREIGN PRIVATE FOUNDATIONS

As the Covid pandemic is largely under control and life has somewhat normalised, the cross border migration has picked up. NZ has migrants from many parts of the world. Whilst NZ’ers are quite used to the concept of Family Trust structure, the migrants from traditional civil law countries are more accustomed to Private Foundations (Foundations), and in particular those of more affluent backgrounds. The most common Foundations are those registered in Switzerland, Netherlands or Lichtenstein.

 

It is important to understand that most Foundations have a separate legal personality from that of their Founders or the Management Board.

 

Foundations are, in general, unless their incorporation documents suggest otherwise, considered companies for NZ tax purposes and beneficiaries of Foundations are therefore considered shareholders.

Consequently, a Foundation is not a Trust and distributions from Foundations will be treated as distributions from Foreign Companies as opposed to distributions from Foreign Trusts and as such taxable.

 

A distribution from a Foundation on dissolution of a Foundation is not income to the Taxpayer to the extent it does not exceed the Taxpayer’s share of the “Available Capital Distribution Amount” calculated under CD44.

 

If a taxpayer residing in NZ is on the Board that manages the Foundation, the Foundation may become tax resident in NZ under the Director Control Test, unless the respective double tax agreement moves the tax residency in favour of the jurisdiction of incorporation.

 

TAXATION OF TRUSTS

IRD has issued a Draft Interpretation statement on Taxation of Trusts that replaces IS18/01. Some of the original IS are largely unchanged but some have been completely rewritten. The main proposals are summarised below:

 

Settlors

• A person who provides services to a trust for less than market value does not become a settlor unless the services are “more than incidental”
• Remedial changes have been made to the definition of “transfer of value”

• The definition of “financial assistance” has moved and been changed to clarify that it involves a transfer of value
• A method for valuing financial assistance has been inserted
• A person can transfer value or provide financial assistance directly or indirectly resulting in them becoming a settlor
• If all the settlors of a head-trust are non- resident, a NZ resident trustee is not generally treated as a settlor of a sub-trust.
• A timing issue has been clarified as to when a person is treated as a settlor if they use a company to settle an amount on a trust.

 

Trustee income

• A NZ resident trustee is assessable on foreign- sourced amounts if the last surviving settlor was a corporate resident here when it ceased to exist
• The exemption for foreign-sourced amounts received by resident trustees applies if those amounts are trustee income
• The exemption for foreign-sourced amounts received by resident trustees does not apply if beneficiary income of a minor has been treated as trustee income.

 

Distributions

• Interest paid by a trustee to a beneficiary on current accounts is not a distribution if it is calculated at either the market or prescribed rate.
• Financial assistance provided to a beneficiary for less than market value is not subject to the ordering rules.
• Whether a distribution has been made to a beneficiary is determined by the actual value transferred and not the market value rules
• The types of capital gains that a foreign trust can distribute tax-free have been expanded to include distributions of assets in specie to beneficiaries
• The source of a capital gain or loss for a trustee is determined under the source rules as if the capital gain were an amount of income.
• The first ordering rule determining the make- up of a distribution is now prior year beneficiary income.
• When considering whether the elements of a distribution from a foreign trust should be reordered, it is no longer a requirement that the distribution has been placed beyond the control of the trustee.

 

Transitional situations

• Elections and voluntary disclosures can now be made so that a trust can be treated as a complying trust.

 

Compliance

• The definition of resident foreign trustee now includes trustees for charitable entities resulting in a requirement to comply with the foreign trust disclosure rules.
• Estates can now claim non-active status.
• Where the imputation credit anti-streaming rule applies, a beneficiary only needs to include the reduced credit in their income.
• A trustee as agent for a beneficiary can retain the benefit of RWT credits to satisfy the income tax liability of the trustee-on-trustee income and/or reallocate the credits to another beneficiary.
• Payers of passive income, including trustees, are required to keep certain records.
• With the trustee rate increasing to 39% from 1 April 2024, SME’s whose shares are held primarily by trustees should consider distributing retained earnings to the extent that they can be fully imputed prior to 1 April 2024.