1. Pending Bright-line Change
The government has announced that the bright-line test for residential properties will revert back to two years, effective from 1 July 2024. This means that properties sold after 1 July 2024 will only be subject to the bright-line rule if owned for less than two years.
The Bright-line Property Rules Summary:
The legislation hasn’t been officially confirmed but based on the current announcements the following example would be impacted by this change:
An existing residential property was purchased 30 June 2020 and rented out to tenants. The owner sells the property on 30 June 2024:
The property will fall under the 5 year bright-line property rule as purchased between 29 March 2018 and 26 March 2021.
As the property is sold within the 5-year period and is sold prior to 1 July 2024, any capital gains on the property will be taxable.
An existing residential property was purchased 30 June 2021 and rented out to tenants. The owner sells the property on 2 July 2024:
Currently, this property would be subject to the 10 year bright-line test, having been purchased on or after 27 March 2021.
However, if the legislation does go ahead, the property will fall under the 2 year bright-line property rule as it has been sold after the 1 July 2024 and been sold outside of the 2-year period.
Therefore the sale will not be subject to capital gains tax.
2. Pending Trust Tax Rate Change
The government has proposed that the trustee tax rate will increase from 33% to 39% with effect from 1 April 2024. This change is to align the trustee tax rate with the increase of the top personal tax rate to 39% introduced in 2020 by the government at the time.
The government has also proposed a de minimis rule to deal with potential over-taxation of trust income where the beneficiaries are not 39% taxpayers. They have proposed that where the trust’s total net income is $10,000 or less, the current trust tax rate of 33% will still apply. For trust’s where the net income is above this threshold, the new trust tax rate of 39% will apply to all income.
Distribution strategies:
Can income from the trust continue to be allocated to beneficiaries with a lower marginal tax rate?
This will still be acceptable.
The distribution can be credited to the beneficiary account or paid in cash to the beneficiary.
Important that the beneficiary is entitled to the distribution or will benefit from the distribution.
Important that the beneficiary doesn’t just resettle the distribution back into the trust as the circularity of the transaction may be viewed as tax avoidance by the IRD.
Please note that if the trust owes more than $25,000 to the beneficiary at year end due to distributions credited to their accounts:
The trust will need to pay a market rate interest to the beneficiary or;
The beneficiary will become a settlor of the trust.
Can a company with a Trust shareholder declare a dividend before 1 April 2024?
A company should have a standard dividend paying policy.
The IRD have said it is ok for a company to change its dividend paying policy by paying out retained earnings before 1 April 2024, or to reduce dividends following this date.
However, the dividend must be genuine and all the formalities of paying a dividend, such as meeting the solvency test, must be complied with.
The IRD may have concern where, despite it being possible for a company to “pay” a dividend by crediting shareholder current accounts, the company has no real ability to pay those credit balances if the company was to be liquidated.
If you are considering paying a dividend before 1 April 2024, this must be declared and properly processed before this date.
With a dividend declared, there will be a dividend withholding tax (DWT) cost to the company (COY) as per usual.
Example declaring a dividend before and after 1 April 2024:
Cash impact on Company:
Cash impact on Trust:
Conclusion: Therefore if the legislation does go ahead, a $150,000 dividend paid 31 March 2024 or earlier would have a net cash cost of $9,000 less than a dividend declared and paid 01 April 2024 or after.
Can a trust change to a different entity structure?
If you’re considering whether a trust is the correct entity structure for you, it is crucial that any changes made are for valid commercial reasons. Otherwise, the arrangement could be viewed as having a tax avoidance purpose or effect. Please get in touch with us if you are considering an entity structure change so we can assist with this decision.
For those clients where Velocite is engaged as your tax agent, and who will be impacted by these proposed changes, your Velocite Client Relationship Owner will be in contact over the coming weeks to assist with decision-making and steps forward.
3. Pending Interest Deductibility Changes for Residential Properties:
The government has announced that interest deductibility will be restored to property investors over the next few years as follows:
The ring-fencing rules are expected to remain the same which means you can only offset excess deductions from rental properties, against rental income, and cannot use it to offset other income such as salary or wages.
With interest deductibility being phased back in, rental properties and portfolios that are negatively geared may go from a position of having taxable income, to making a loss.
The ring-fencing rules will still apply to these losses.
The government has officially confirmed that these changes will take place however the legislation is yet to be released. The exact details of the legislation could always throw up some unexpected issues.
Disclaimer: No liability is assumed by Velocite Limited for any losses suffered by any person relying directly or indirectly upon any article within this website. It is recommended that you consult your advisor before acting on this information.