Further Changes to Bright-line Test and Interest Deduction Limitation Rollover Relief
28 October 2022
The Taxation (Annual Rates for 2022-23, Platform Economy and Remedial Matters) Bill includes proposals to modify the rollover reliefs from the bright-line test and interest deduction limitation rule. These rollover reliefs were only introduced in March this year with application to land sales occurring after 1 April 2022.
For the bright-line test, where rollover relief applies, the transfer of residential land from one person to another does not reset the 10-year bright-line period and the transferee’s bright-line period is treated as commencing on the same day as the transferor’s bright-line period. Further, when the residential land is transferred for cost or less, no income arises under the bright-line test for the transferor (normally such transactions are required to occur at current market value).
For the interest limitations rules, where rollover relief applies, a loan drawn down by the transferee to acquire a residential property will be a grandparented transitional loan to the extent that the loan is not more than the transferor’s grandparented transitional loan, thereby preserving any available deduction for interest. Grandparented transitional loans are those loans for which interest deductions are progressively denied from 1 October 2021 to 31 March 2025 as opposed to the complete denial of interest deduction from 1 October 2021 on non-grandparented loans.
The rollover relief provisions apply to transfers into and out of trusts meeting specific criteria (referred to as “rollover trusts”) and transfers between different capacities (for example from a partnership to its partners). However, the rules as enacted do not provide relief in all the circumstances initially intended and there are several technical issues with their application. The Bill seeks to clarify where there is rollover relief provisions and ensure they work as intended, particularly in relation to transfers of land to and from family trusts.
One of the issues with the existing rules is that for rollover relief to apply to a transfer of land from the trustees of a trust to the settlors of that trust, the land being transferred from the trustee to the settlor must have been originally settled on the trustee by the settlor. This requirement caused two problems and narrowed the application of the rollover relief provision.
First, for land to be settled on a trust requires it to have been gifted to the trust; that is, transferred for no consideration. Typically, land is introduced into a trust by the settlors selling the land to the trustees at market value and providing a loan to the trustees for the purchase price that is then forgiven. This is not a settlement of the land; the settlement arises from the forgiveness of the loan. Therefore, where this procedure had been followed to introduce land into a trust no rollover relief is available when the land is transferred back to the settlor. To address this issue, it is proposed to replace the requirement that the land was settled on the trust by the settlors with a requirement that the settlors have transferred the land to the trustees. This will mean where land has been introduced through a sale rollover relief may apply.
This amendment does not address the second issue, which is the requirement that the land being transferred back to the settlors is the same land that the settlors had transferred to the trustee. Therefore, where the settlors had transferred a dwelling to trustees, the trustees subsequently sold that property and acquired a replacement property, the transfer of the replacement property to the settlors does not obtain rollover relief. Also, no rollover relief is available where the settlors have provided funds to the trustees to purchase a dwelling rather than transferring a dwelling to the trustees. To address this issue, it is proposed that rollover relief can apply when trustees transfer land to settlors provided those settlors were principal settlors of the trust when the trustee acquired the land and are principal settlors when the trustees transfer the land to them.
Another issue addressed by the amendments is that of resettlements of trust. Under the existing rules, the resettlement of residential land by the trustees of one trust on the trustees of another is not given rollover relief. Rollover relief for a resettlement may be achievable indirectly by transferring the land from the trustees of the first trust back to the settlors and then having the settlors settle the land on the trustees of the new trust. To address this issue it is intended to grant rollover relief where the trustees of one rollover trust settle land on the trustees of another rollover trust with either the same beneficiaries as the first trust or that are close family associates of the settlor of the first trust.
While these proposals address some of the issues with the existing rollover relief provisions that restrict their application, they do not address them all. There is still a requirement that land is transferred from trustees back to settlors in the same proportion that they transferred it to the trustees. For example, if two individuals jointly owned land 50/50 when they settled it on the trust it must be transferred back to them into joint 50/50 ownership. This is problematic when one of the individuals has subsequently died. The amendments also fail to address issues with the bright-line test that arise when parents have used their family trust to assist a child into a home or have done so personally and ended up with their names on the title of their child’s home. There is still no rollover relief proposed for situations where the trustees wish to transfer a property out to beneficiaries who are not principal settlors of the trust or to assist with these family arrangements.
The Bill is not to be reported back to Parliament until March 2023 and will not be enacted until later that month. While the amendments are intended to apply from 1 April 2022, they are not going to be law until March 2023 and may be changed as the Bill proceeds through Parliament. Therefore, caution is required if considering undertaking transactions in reliance of these proposed amendments.
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