TAX BITES #24 - To Keep or Wind Up a Trust
About the Author:
MURRAY McCLENNAN
Director at Tax Central
A chartered accountant and a member of the International Fiscal Association and the Society of Trust and Estate Practitioners, Murray has over 30 years experience in tax.
The impending implementation of the Trusts Act 2019 has prompted many people and their advisors to question whether existing trusts should be retained or wound up. This article focuses on potential tax issues that trustees and their advisers may wish to consider.
Do the trustees hold revenue account assets?
Examples of potential revenue account assets include:
Land held on revenue account.
Trading stock.
Livestock
Shares held on revenue account.
Financial arrangements.
FIF investments
A sale or distribution of revenue account assets will trigger taxable income on a gain. Please note that a distribution is a disposal. There are specific anti-avoidance provisions relating to the disposal of revenue account property. For example, Section GC 1 deems the transfer of trading stock and land at below market value to be at market value.
Do the trustees hold depreciated assets?
The point of asking this question is whether there would be depreciation recovered on the sale or distribution of depreciated assets. Examples of such assets include:
Commercial buildings.
Residential rental dwellings held before the change to stop depreciation of rental dwellings.
Plant and equipment.
Beneficiary debt
Loans to beneficiaries and overdrawn beneficiary accounts are financial arrangements. The remission of beneficiary loans and overdrawn beneficiary accounts will result in taxable income for the beneficiary.
Land held on revenue account continues to be held on revenue account
Land held on revenue account that is distributed land to a beneficiary is also held by the beneficiary on revenue account. This rule also applies if the land is sold to an associated person. The transferor steps into the shoes of the transferee.
Do not forget GST
If the Trust is registered for GST a sale or distribution of assets related to the taxable activity will be a taxable supply. Also bear in mind that a supply to an associated person at less than market value generally will be deemed to be supplied at market value when determining output tax.
Taxable supplies of land, or including land, may be able to be zero-rated. The recipient will need to be a registered person.
Cash Flow
If revenue account or depreciated assets are sold and payment is received, there will be cash flow to pay any resulting tax liabilities.
GST and Airbnb Operators
In an earlier article I identified the issue of GST-registered persons with Airbnb rentals changing to residential rental:
If the change is permanent, there is a deemed supply at market value.
If the change is temporary there are return-by-return adjustments.
Inland Revenue has announced a recent change to allow registered persons to remain GST registered for 18 months if their Airbnb rentals are rented long-term and Inland Revenue receives advice that the change in use is temporary due to the impacts of Covid 19.
Director
Tax Central Ltd
027 244-5365
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