Property rules may impact family trusts

Trust deed and house

Property rules may impact family trusts

The new rental property rules proposed by the government may have an unintended consequence of imposing a compliance burden on tens of thousands of family trusts in New Zealand.

New Zealanders commonly own assets such as the family home in trust. The advantages are well canvassed so we won’t cover them in detail here. Suffice it to say that by having the trust owning the family home, the house is protected by the settlor’s creditors. This alone is a powerful inducement to adopt this structure, particularly for business owners. There was also a significant number of trusts established over a decade ago where home owners sought to shield the family home from the means testing provisions around rest home subsidies.

We recently gave an overview of the government’s proposed changes around rental properties and you can read that article by clicking here.

The majority of family trusts are thought to hold only the family home by way of assets. As such, there is no need to register the trust with the IRD as there are no tax considerations. Quite simply the trust doesn’t generate any taxable income.  This may be about to change however. The bill that is before Parliament is currently drafted to only exempt individuals who own a family home from providing an IRD number when a property is bought or sold. It follows therefore that a trust would require an IRD number.

In a submission to the select committee, big four accounting firm EY (formerly Ernst and Young) submitted that “obtaining an IRD number for a domestic family trust may not be difficult to do in itself, but we suspect the Inland Revenue may then seek or require returns of income to be filed for such trusts each year, even though they may not have derived any taxable income for any year.” This would necessitate increased compliance costs and for no discernible benefit for the tax base.

We share the concerns of many in the profession that the rule changes could bring about unintended costs for family homeowners who hold the property in trust. We’ll monitor the situation and let you know how the final bill is drafted.

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