Long awaited family trust residential property rollover relief now enacted

No this is not a headline about New Zealand's family dogs finally receiving a treat after rolling over countless times on command (I can barely get my cavoodle to sit on command, let alone roll-over....). Rather it's about The Taxation (Annual Rates for 2022 – 23, Platform Economy, and Remedial Matters) Bill (No 2), which received Royal Assent on 31 March 2023 and introduced a range of important amendments to the Income Tax Act 2007. These include broadening the rollover relief available for family trusts under the bright-line rules for residential property.

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Under the residential property bright-line rules, if a property owner sells a residential property that has been owned for less than 10 years, the gain made will be taxed unless an exclusion applies (for example the sale of your main home). Rollover relief allows property transfers in certain situations (for example under a relationship property agreement) to be exempt from tax under the bright-line rules. In a rollover situation, the property is considered to have been purchased at the same time as the transferor and for the same amount.

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The rollover relief available for family trusts has been inadequate since it was introduced.?Prior to the amendments, the bright-line rollover rules required that the settlor of a trust must have originally transferred the land in question to the trust (i.e. the settlor must have been the original owner of the land). This meant that rollover relief was not available where cash or other property was settled on the trust that was then used to acquire the property, or where the settlor receiving the transfer of property was not an original settlor of the land. This limited the rollover relief available to trusts.

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The new amendments greatly expand rollover relief to apply where each transferor and each transferee is both a settlor and beneficiary of the trust, at least one transferor or transferee is a principal settlor, and the trust is a “rollover trust.” A “rollover trust” being one where:

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1. All principal settlors are beneficiaries of the trust;
2. All principal settlors are close family associates; and
3. All beneficiaries are all close family beneficiaries.

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So the requirement that the original settlor receives back the land that was originally settled on the trust in order for rollover relief to apply is removed.

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Rollover relief will apply where a property is transferred from a trust up to settlors and then back down to a new trust. It will also apply where property is transferred directly between two trusts – this is provided both trusts have the same beneficiaries.

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While these amendments greatly expand the rollover relief available and is very welcome news, it is important to note that this applies to disposals having occurred on or after 1 April 2022. So while these changes are taxpayer friendly and a sensible and pragmatic development in our tax laws, they are not entirely retrospective in nature.