Stupid Tax law - Be Very Careful With Nominations!

[Rosco]

STUPID TAX LAW - BE VERY CAREFUL WITH NOMINATIONS!


Consider this: You buy a section off the plans for your personal home. You put your personal name or nominee on the agreement as you need to discuss with your advisors which entity to put the section under. You then nominate your Family Trust. Surely there can't be any tax issues? It's going to be your personal home too!

Well, there could be unexpected tax consequences. If you are buying a residential property, and then nominating another entity, you need to consider the 2 year Bright-line test.

We are finding this situation is coming up quite often and we think the rules around this are a joke!

Bob signs a Sale and Purchase Agreement to buy a section for $200,000 in January 2016 to build his personal family home.

In October 2016, Bob has now established a Family Trust. Bob nominates the Family Trust as the purchaser. The market has jumped in value and the section is worth $300,000 at this time (October 2016). Title is then available in January 2017, when Bob's Family Trust settles on the property.

• IRD treat the nomination as a sale. So for the 2 year Bright-line Test - purchased January 2016 and sold October 2016, which is within two years.
• You might be thinking 'No worries, there is personal home exemption'. WRONG. This is just a section, so isn't Bob's personal home yet, so NO EXEMPTION.
• Or, 'Surely there is something in the rules to allow for related party transfers like this'. WRONG. There is no allowance in the Bright-line Test for related party transfers (this is an area where you have to be particularly careful!).

SUGGESTIONS:

If you are looking at purchasing a property, ideally put the correct purchaser on the Sale and Purchase Agreement to start with.

If this isn't possible, then as soon as you are able to nominate the correct entity, get proof of the values (and keep this), and if there is no change in value, nominate the new party.

If there has been an increase in value, then you might have to wait until you can transfer the property into the correct entity without being taxed by the Bright-line Test (either after two years or once personal home test satisfied - it is worth checking this timing with an expert!).

See relevant excerpt below from IRD Tax Information Bulletin.
Kind regards
Ross Barnett

[Anthonyacat]

This has got to be a joke. I mean, I can see how if they exempted it, people could use this as a way of selling property on without paying tax - but how can this be anything close to the 'parliamentary intention' argument they have been using to win all their cases?

This one needs to be challenged. It's ridiculous.

Care to share the TIB reference? Have been travelling home the last couple months and need to catch up.

[Wellington Broker]

Nice write up. Just to clarify - is this IRD's position or an educated opinion?

Obviously buyer's agents and flippers need to be captured if they're onselling prior to settlement but family trusts are a different matter.

Based on this interpretation someone living in the home who intends to buy a new house but keep the existing property and take advantage of tax benefits by moving the asset to a LTC may have the same issue?

[McDuck]

Well this whole thing is fascinating for a variety of reasons.
So a quick backtrack with respect to the law.

You need to be free to own things.
You need to be a living person to own things.

Non living entities like immiginary collections of people (companies) get given the right to own things under law, thus gaining some of the rights of a person.

Non living things like trust's get given the right to own things.

Trusts get subverted away from their original intention and used for tax advantages.

A trust , seeming like a person in the eyes of the law, buys a property from an actual breathing living person, and has to pay tax.

Seems ok to me, you want the rights of a person, you have the responsibility of a person.

As a trust , you should be happy that you can live for thousands of years, while breathing real people are stuck with a century if lucky.

As a trust, you have more of a vested interest in paying tax than a flesh and blood person, as tax pays for Government, and that upholds the other immiginary structures that you live within.
I.e. Fleshies can go bush, you can't. (ha).


No, I don't want to think about an Ai managed trust of the future.

So, an odd take on it for a bit of perspective.

[Rosco]

Is it IRD's position - the bottom part is from a Tax Information bulletin, so the nomination part being a slae is their position.

Would they assess in this exact circumstance? Who knows. But as it is the law how it is currently written, and based on their position on nominations, you would think they would assess this as taxable income if they found it.

Overall, is it worth the risk. Do you want to be the unlucky person who gets taxed on this, plus penalities and plus interest? The tax on the example in my blog is $33,000 if Bob is on a high income!

If IRD taxed you , could you defend it. Probably not, as there is no related party rules in the Brightline test.

Ross

[Perry]

Non living things like trusts get given the right to own things.

Only sort-of. In the case of a property, it is the Trustees names which appear on the CoT - not the name of the Trust.

A Trust is a 'legal obligation,' not a 'legal entity.'

[McDuck]

Only sort-of. In the case of a property, it is the Trustees names which appear on the CoT - not the name of the Trust.

A Trust is a 'legal obligation,' not a 'legal entity.'

That's a good point, its more like a caregiver, but can it still own property?
If a trust ( not sure how many kinds there are ) can own property, then it is a person.

[McDuck]

(then it is a person, within the context of this argument)

As I research the origins of trusts...hmm interesting.. Crusades...Courts of Chancery...split between legal and benifical ownership.. that's important.

See, is there really a split between legal and benifical ownership, and without that, is it a legal trust?

Ah, got it, Henry VIII , Statute of uses 1535.
Still digging, and, Law of property act 1925.

[Perry]

Only sort-of. In the case of a property, it is the Trustees names which appear on the CoT - not the name of the Trust.

A Trust is a 'legal obligation,' not a 'legal entity.'

That's a good point, its more like a caregiver, but can it still own property?
If a trust ( not sure how many kinds there are ) can own property, then it is a person.

I only know a little about NZ law. Ancient aspects like Knights Templar and so on might be of historical interest, but may not apply to today's world.

As a Trust is not a legal entity, it cannot be the owner of a property, in NZ, in the sense that the expression ABC Trust could not appear as the (or an owner) on a CoT. However, if there was an entity called ABC Trust Ltd, which was wholly owned by ABC Trust, then ABC Trust Ltd could be on the CoT.

[Anthonyacat]

However, if there was an entity called ABC Trust Ltd, which was wholly owned by ABC Trust, then ABC Trust Ltd could be on the CoT.

Fascinatingly, or at least to me, such a company is apparently not allowed to own shares in listed entities! Well, at least to the letter of the Computershare documentation I've been provided. I'm sure in practice it's not enforced.


But this all diverges hugely from what is the most stupid IRD briefing in quite some time. If challenged in court, this must be overturned. Just in the same way the IRD have used Parliamentary Intention to win cases (Alesco, etc) wherein the letter of the law was against them, they would have to lose this one. Not a chance the High or Appeals court would agree the govt wanted to tax people for their choice of ownership, prior to taking true ownership.

[McDuck]

I only know a little about NZ law. Ancient aspects like Knights Templar and so on might be of historical interest, but may not apply to today's world.

As a Trust is not a legal entity, it cannot be the owner of a property, in NZ, in the sense that the expression ABC Trust could not appear as the (or an owner) on a CoT. However, if there was an entity called ABC Trust Ltd, which was wholly owned by ABC Trust, then ABC Trust Ltd could be on the CoT.

Lol. It's just that with law, they have a thing called "Precedent". So what went before does matter.
As it turns out, Trusts and how they have been used is an evolving thing from before the rights of man anyway.
And there's been an ongoing battle with trusts and tax for hundreds of years, so this is just a replay of old ground.

(The interesting thing to me is that Sir Francis Bacon was involved in the last one of these standoffs.)

But yes, the Govt makes the law, and The Courts may not agree with them.

[Perry]

But yes, the Govt makes the law, and the Courts may not agree with them.

Well, so far in NZ, it is not usually the prerogative of the Courts to disagree with the law.

NZ Parliament writes the laws; NZ Courts interpret and enforce the laws. More or less, anyway.

This present matter is an indicator.

From this thread Rental property damage: Landlords liable - court rules

[McDuck]

Let me think on it.
I'm considering the seperation of law and government at the moment.
I'm still sifting through trusts for anything interesting.
Good challenges though. Nice to meet someone with a brain.

[McDuck]

Well, so far in NZ, it is not usually the prerogative of the Courts to disagree with the law.

NZ Parliament writes the laws; NZ Courts interpret and enforce the laws. More or less, anyway.

This present matter is an indicator.

From this thread Rental property damage: Landlords liable - court rules

Ok, so very interesting.

Essentially the OP has given some very good advice.

As for your thoughts on the relationship between the Govt and the Courts, there is a clear seperation of powers.
For the very good reason that it preserves Democracy.

As for the rights and wrongs about introducing a bright line test, a very pragmatic way of setting limits, and this unintended consequence.
Well, people abusing the Trust structure have spoiled it for everyone. (That's usual human behavior, isn't it).

In terms of the big idea, a Trust seems to be tolerated in law because it is needed to hold property on behalf of another.
That points to the idea that a Trust is not a good financial tool to hold something for yourself.

Scott said it best,
Oh, what a tangled web we weave.

[motivated]

With respect the IRD seem to have missed the point. A nomination is NOT a new sale. The Nominee takes on all the terms, rights conditions and obligations etc that were written into the contract by the original purchaser. It is cr*** to suggest that a 'perceived' increase in value from when S&P was signed until the nomination is effective several months later is taxable at that point. Who says it is worth more anyway??? it may be or may not be worth more. Was the original price a steal ?? What if the market is dropping. What would ird position be then-- A tax refund??
I would ask the same question of Ird. So the original party that signed the S&P took the property on themselves by nominating themselves (wow-- we have a new contract here) and the value may have risen --- so they want to tax ANY deal where the likely value at settlement is more than the signed up pp.
Their whole logic is a crock of sh****