Parents may be subject to tax, even when there is no intent to profit from the transaction, if they sell or gift their portion of a property to their children within the relevant bright-line period, according to CA ANZ NZ Tax Leader John Cuthbertson. 

If there is a disposal of land for inadequate consideration, the Income Tax Act may deem that the person disposing the land has derived income equal to the lands market value at the time of disposal.

When there are changes in the ownership of a property, such as changes to the proportionate ownership share in that property, it may result in a full or partial disposal for the co-owner(s) reducing their share and an acquisition to the extent of their increased ownership share for all remaining or new co-owners. This can result in a tax liability and the restarting of the bright-line test period. 

Inland Revenue recently published Interpretation Statement 22/03: “Income tax – Application of the land sale rules to co-ownership changes and changes of trustees”, setting out their position as to whether certain changes in co-ownership of land involved a “disposal” of that land for the purposes of the land sale rules (including the bright-line test). 

Changes in co-ownership of land potentially subject to the land sale rules include:

• A change to the proportionate share each co-owner has. A transfer between co-owners which results in a change in the proportional or notional share in land will represent a “disposal” under the land sale rules for the co-owner with the reduced share. The disposal represents the share in land that was not retained. 
• Adding a new co-owner. An owner (or owners) of land can add another person as a co-owner. Where this happens, there is a disposal under the land sale rules. The disposal is made by any existing co-owner to the extent that their share (or notional share) in the land is reduced. 
• Removing a co-owner. If land is co-owned and there is a transfer that removes one or more co-owners, that transfer will be a disposal by the departing co-owner(s) of their share (notional share) in the land. 

The interpretation statement also confirms that there is no “disposal” for the purposes of the land sale rules where there is simply a change in the form of co-ownership (i.e. a change from tenants in common to joint tenants). The transfer of land to reflect a change in trustee of a trust will also not represent a disposal.

The start date of the bright-line period typically commences from when an instrument to transfer an interest in residential land is registered under the Land Transfer Act. As a general rule however, the date of acquisition will determine which bright-line test applies. 

Where a part share of residential land is acquired or disposed, the policy intent regarding the bright-line period is clear - the bright-line period should only reset for the ownership share in land that has changed hands (i.e., the increase in holding). The retained component (seller) and original holding (purchaser) should not be impacted. 

The legislation as currently enacted supports the above position for the seller. A minor drafting error still needs to be remedied to support the purchaser’s position.

There are also issues with the current wording of the legislation as to which bright-line test applies (and to what extent) when a co-owner increases their proportionate share in residential land. We are currently in discussion with Inland Revenue to seek an appropriate solution.