Inland Revenue’s (IR) Question We’ve Been Asked (QWBA), draft PUB00489, clarifies that rollover relief applies to transfers between associated persons in many more cases than previously understood.

Imagine this scenario: After two years of owning a residential investment property, Bob and Shirley decide to transfer it to a family trust for the benefit of their family, including their adult children and grandchildren. No thought is given to the bright-line rollover relief provisions, as the transfer is not subject to tax under the bright-line test.

To their surprise, when reading draft PUB00489, they find that rollover relief must still be applied whenever the eligibility conditions are met, even if no bright-line tax obligation will arise in the future, given the property has been held for more than two years. This means that the trustees of the family trust “step into the shoes” of Bob and Shirley, inheriting the original acquisition date, cost base, and property usage history.

These elements may not always result in favourable outcomes (where the bright-line test is still in play), as the transferee assumes the transferor’s tax position, which could affect future eligibility for exemptions like the main home exclusion. Rollover relief can only be applied once for the same residential property in a two-year period.

Key takeaways from draft PUB00489

• Application of rollover relief: Rollover relief is not optional. If the transfer qualifies for relief, rollover must be applied.
• Consequences of rollover relief: Applying rollover relief transfers the transferor’s acquisition date, cost base, and property-use history to the transferee. This can be disadvantageous, as the transferee effectively inherits the transferor’s tax position, including any past use of the property as a main home or investment property. Future tax implications may arise based on the transferor’s history rather than the transferee’s actual usage, affecting eligibility for exclusions like the main home exemption. Having to adopt a lower cost base may also result in more tax if there is a further sale of the property within the two year bright-line period.

Eligibility and application process

IR’s draft PUB00489 offers guidance on critical aspects of the relief, including:

1. Eligibility: It specifies who qualifies as “associated persons” under Subpart YB of the Act. Eligible relationships include family members within two degrees of blood relation, individuals and their trusts, and companies and their shareholders. Importantly, the property in question must be residential land as defined in Section YA 1, used primarily for dwelling purposes.

2. Application process: Taxpayers claiming bright-line rollover relief must:

• Verify that both the transferor and transferee qualify as associated persons.
• Confirm the property’s eligibility by ensuring it is residential land and not used for other purposes, such as business.
• Document the relationship and purpose of the transfer, maintaining records for IR.
• Complete the required IR833 disclosure form and file with the relevant year’s tax return.

3. Continuity of the bright-line period: Draft PUB00489 clarifies that under rollover relief, the transferee inherits the transferor’s acquisition date and cost base, meaning the bright-line period remains unbroken. If the property is later sold to a non-associated party, the original acquisition date applies, potentially resulting in tax liabilities based on the transferor’s history.

CA ANZ submission

CA ANZ has recommended further clarifications to enhance PUB00489’s effectiveness:

• Explanation of non-bright-line application: CA ANZ suggests that IR clarify why rollover relief applies even if the bright-line test does not.
• Explicit statement on mandatory relief: CA ANZ proposes that the QWBA emphasise rollover relief’s mandatory nature, clarifying that it must be applied regardless of outcomes.

PUB00489 helps prevent unintended tax consequences in legitimate property transfers. However, it can also lead to unfavourable outcomes. Taxpayers engaging in intra-family or intra-entity property transfers should familiarise themselves with this statement once it is finalised.