Rollover relief

By Max Gunawan, Platinum Legal

I have spoken to several people who are concerned that transferring their residential investment properties into a family trust may ‘reset’ or ‘trigger’ the bright line test. They may have some limited relief given that the government has broadened existing rollover relief provisions in March 2022 which you may be interested to know.

By way of background, the government created ‘bright-line period’ for all purchases of properties that occurred after 1 October 2015. If you purchased a property after this date, and you sell the property before the relevant bright-line period expires, then you may be liable to pay income tax on any capital gains that you earn. Most people that live in the residential property as their main home is able to rely on the main home exception, though this is a slightly different topic.

The bright-line period has been changed several times. These are:

• on or after 27 March 2021 and sold within the 5-year bright-line period for qualifying new builds or within the 10-year bright-line period for all other properties

• between 29 March 2018 and 26 March 2021 and sold within the 5-year bright-line period

• between 1 October 2015 and 28 March 2018 and sold within the 2-year bright-line period.

The bright-line period is a primary consideration for anyone engaged in asset restructuring. The risk is that by moving assets from one entity to another, the bright-line period may be inadvertently ‘reset’ and the person may then become liable to pay income tax if they were to sell the property within the refreshed bright-line period.

The broadened rollover relief provisions under CB 6AB Income Tax Act 2007 allow settlors some flexibility to transfer their residential properties to their family trust (and in some cases, vice versa) without ‘triggering’ or ‘resetting’ the bright-line periods.

While this is encouraging, particularly for those that are interested to restructure their assets currently, the relief should be relied on with a great degree of caution. For example, the relief is only given to where the transaction is to and/or from a “rollover trust”. This term is narrowly defined and is likely only applicable in some trust structures only.

We suggest that any person wishing to explore the flexibilities given in this area tread carefully and consult with their tax advisers and legal advisers closely.

If you have any questions about any matter raised in this post, please get in touch with us.

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