March 07 2014
A change in government may have implications for your trust
With an election coming up this year we thought it would be interesting to turn our minds to what impact this election, or the next, may have on how you operate and what you place in your family trust.
The Labour Party is promising a capital gains tax (CGT) of 15% with an exemption for your family home. Also promised is an increase in the top tax rate for high earners (over $150,000 and indexed)¹. You can never second guess what future legislation will look like but it’s probably time that you started to think about changes you may need to make in the future.
Capital gains tax
New Zealand is believed to be the only country in the OECD that has no form of CGT; so it’s likely that this will be adopted here sooner or later. The country nearest to us with a CGT regime is Australia. In the interests of aligning tax laws we are making the assumption any future New Zealand government will adopt legislation that’s similar to the Australian laws. Some points of interest:
Pre-commencement date exemption: Generally capital gains and capital losses from pre-CGT assets are exempt. The Labour Party has confirmed that if it becomes the government, this will occur. Will we see a flurry of purchases just before any future CGT legislation?
Family home exemption: In Australia this is referred to as the ‘main residence exemption’. Labour’s finance spokesman, David Parker, has confirmed the exemption will apply regardless of the entity holding the family home (sole name, joint names, trust or company). Only one property, however, will be exempt. This is great news for those holding their family home in a trust as in Australia the main residence exemption is not available for a home held by a family company or a trust.
Capital gains made by trusts: If you receive a distribution from a trust under the Australian legislation, you may have CGT consequences. Some types of distribution from trusts are relevant for CGT purposes:
- Distributions of the trust’s net income for tax purposes that includes a net capital gain ;
- Distributions or other entitlements described as being referable to a specific capital gain or gains ; or
- Distributions of non-assessable amounts.
Be prepared for a new set of complicated rules.
Proposed change to the top tax rate
At the time of writing, Labour’s policy announced in its 2011 manifesto of putting the top tax rate back to 39% for income earners over $150,000, remains in place. When Dr Cullen increased personal tax rates from 33 cents to 39 cents there was a huge growth in trusts and Messrs Penny and Hooper² (use of a company with a trust as shareholder to reduce personal income tax, which was ruled to be tax avoidance) type structures.
If the personal tax rate returns to 39 cents the Inland Revenue is likely to pay more attention to your trust structure. In that case, the administration of your trust and good record keeping are likely to become more important – this is something you can start on now.
It will be important you work with all your professional advisers to ensure your trust documentation is sound and cannot be attacked in light of the Penny and Hooper and Krukziener³ (Inland Revenue reconstructing as income over $5 million of current account advances from a trust as income) decisions.
There are likely to be considerable impacts for trustees and beneficiaries if there is a change in government. In anticipation of possible changes, perhaps it’s time to contact us to perform a health check on your trust and trust structures?
¹ Labour Party Policy Platform and 2011 Labour Manifesto
² Penny and Hooper v CIR NZSC95
³ Krukziener v CIR 24NZTC24.563