It was thought-provoking to read recent coverage of a well-known member of the property community whose business activities have led to prosecution by the commerce commission for anti-competitive practices.

It was reported that whilst the practices were undertaken deliberately, it was accepted that the person concerned, and presumably the clients, had no idea that the activities were illegal.

This got me thinking about the complexity of financial laws and of course the complexity of tax law and how easy it can be to walk into a situation where you have a tax issue that you never saw coming.

Of course, those with accountants that are willing to use them, take advice, and do their best to see issues ahead of time and take action to navigate around hazards or at least manage them.

But as more tax law appears to be designed to drive a social agenda rather than simply collect revenue, the risk of falling foul of the law without realising it has increased.

Bright Line Blunders

A case in point is the bright line legislation, and specifically, its move from two to five years. When this change was mooted, treasury advised that the change would create an increase of cases unintentionally leading to a tax liability. In some cases, these tax liabilities could be incurred by people who don’t even have an investment property and do not have an accountant or tax adviser.

Consider a few examples: Jack and Jill decide to help their son John onto the property ladder, but they are concerned by John’s relationship with Roxanne.

They decide that their trust will buy a property for John and Roxanne to live in as their home. John is a beneficiary of the trust.

Roxanne leaves John and he decides he needs some time overseas to get over the breakup. Jack and Jill sell the house and make a modest windfall gain.

What Jack and Jill don’t realize is that the main home exemption to the bright line test when a property is in a trust only functions to exempt the gain from tax if the person living in the home is the principal settlor. Whilst they all consider the property to be John’s home, he is not the principal settlor of the trust and accordingly the gain on disposal is taxable income to the trust.

Consider also Don and Debbie. They live on Waiheke island but they both work in the city and commute daily on the ferry. Having found themselves stranded on the dock due to ferry unreliability one too many times they resolve to buy an apartment in the city and choose to spend Monday night to Thursday night city side in their apartment.

Despite this arrangement, when you ask Don and Debbie where they live, they tell you they live on Waiheke.

However, the reality is they have two homes. One on the island and one in town. But the tax legislation makes it clear you can have more than one home but never two “main homes” for the purpose of the exemption from bright line.

This means that when Don and Debbie sell their home on Waiheke quickly after Debbie suffers a medical event that will require her to have access to Auckland Hospital, they may find themselves with difficulties claiming the main home exemption for Waiheke, because the home that they have spent the majority of their time in since
they bought Waiheke, is actually the city apartment.

Both Don, Debbie, Jack and Jill don’t have an accountant, and never believed they needed one.

They are both shocked two years on from selling their properties to receive in the mail letters from the IRD that have clearly matched their IRD numbers to land transfer records and are seeking explanations for why the gain on sale of a property, identified by its address, have been omitted from their tax returns when sold within five years’ of acquisition.

It’s only now that they seek any advice.

My point is to remind you that with tax, it’s what you don’t know rather than what you do that will bite you. With land transactions now, you should always assume there might be something you don’t know and seek advice before you act, especially if a sale will render a profit.

Remember, ignorance is no defense under the law. ■