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Changes to trustee duties introduced by amendments to the Trusts Act 2019 have resulted in a number of Trusts reviewing their current arrangements and structures.  Some of these changes have required people to consider whether having a Trust is still the right fit for them.  When thinking about changing your Trust, it is important to consider the effects of the bright-line test.

What Is The Bright-Line Test?

The bright-line test enables the Government to charge income tax on any profit that is made when a property is sold within the stipulated time frame.  The bright-line test starts from the date a party’s name is registered on the property’s record of title and ends when you enter into an unconditional Sale and Purchase Agreement for the sale of the property.

Bright-Line Time Frames:

The bright-line test period that applies depends on when you purchased the property.  If you acquired the property:

  • Before 1st October 2015 – the bright-line test does not apply.
  • Between 1st October 2015 – 28th March 2018 – the 2-year bright-line test applies. So, if you sell within 2 years, you will pay tax.
  • Between 29th March 2018 – 26th March 2021 – the 5-year bright-line test applies. So, if you sell within 5 years, you will pay tax.
  • After 27th March 2021 – the 10-year bright-line test applies. So, if you sell within 10 years, you will pay tax.

Exception To The Bright-Line Test – Family Home

The bright-line test does not apply when the property you are selling is your main family home. Whether a property is your main family home depends on your use of the property.

If you acquired the property before 27th March 2021 and have the property for 50% of the time as your main family home, then the exception applies.

However, if you acquired the property after 27th March 2021, the exception differs.  After this date, if the property is used in a way that is not for the family home for more than 12 months, then you will have to pay tax proportionately on the time the property was not used as the family home.

Whether the property is classified as your main family home or not is not always clear.  This is why it is important to obtain advice from us or your accountant before selling.

Moving Trust Property May Trigger The Bright-Line Test

A Trust that transfers a property within the relevant bright-line time frame may be captured by the bright-line test.  Transfers of trust property include selling trust property, transferring trust property to a beneficiary, changing ownership of trust property and resettling trust property from one trust to another.

If ownership changes within the bright-line period and the main family home exemption does not apply, the effect is that the time period restarts and any increase in value to the property may incur a tax liability.  If tax is payable, then the bright-line test rules deem that the land has been disposed of at market value despite the fact this may not be the case.

Even if the the bright-line test does not apply to trust property transfers, it is important to note that any new owner will still be subject to the 10-year bright-line test (or 5-year bright-line test if the property is a “new build”) when they decide to on-sell or transfer the property.

How Can We Help?

If you are considering reviewing your Trust structure and changing ownership of Trust assets, please contact Collins & May Law so we can provide you with advice on any implications of doing so.