Tax of death and asset distributions
1 July 2004
Tax of death and asset distributions to be clarified
The government will clarify the income tax rules on transfers of assets at death and liabilities to beneficiaries, Revenue Minister Michael Cullen announced today.
“The changes, to be effective from enactment and included in the taxation bill planned for this year, will apply only to assets and liabilities that are in the tax base such as buildings for which depreciation is being claimed, for example rental properties, and land or shares for which the gain is taxable.
“The vast majority of estates will not be affected as their assets are not in the tax base.”
“The current tax law is unclear and over the years there have been repeated calls for reform,” Dr Cullen said. “There is uncertainty about the tax treatment of ‘in kind’ distributions of assets from trusts and estates, as well as gifts of all kinds regardless of the circumstances.
“To add greater certainty and consistency, the government will introduce comprehensive rules that provide a uniform income tax treatment of these asset transfers,” Dr Cullen said.
The three main proposals are: A disposal and acquisition of a taxpayer’s assets and liabilities will be deemed to occur at market value, on the day of his or her death; ‘In kind’ distributions of assets by companies and trusts (including estates) will be treated as dispositions and acquisitions at market value. Gifts will be treated in the same way as ‘in kind’ distributions.
“Exclusions will relate to estates left to spouses who are the only beneficiaries, to forestry assets on the owner’s death, and to simple estates when the assets are left to charity or to close relations,” Dr Cullen said.
The full list of proposed changes approved by Cabinet is attached.
PROPOSED CHANGES APPROVED BY CABINET
1. The three key
proposals are that:
A disposal and acquisition of a taxpayer’s assets and liabilities will be deemed to occur at market value, on the day of the taxpayer’s death. “In kind” distributions of assets by companies and trusts (including estates) will be treated as dispositions and acquisitions at market value. Gifts will be treated in the same way as “in kind” distributions.
2. The effect of the proposals is that there will be two valuation points in respect of each deceased individual’s estate: one on the day of death, and another when the estate is distributed. However, the following exceptions will apply:
When the only beneficiary of an estate is the spouse of the deceased, roll-over relief will be available both on the taxpayer’s death and on any subsequent distribution of the estate to the spouse. [Roll-over relief occurs when the disposer’s tax values transfer to the person who acquires the asset or liability. Therefore no tax liability arises to the person who disposes of the assets or liabilities.] There will be only one valuation point (the day of death) when the estate is distributable immediately after probate, and the following circumstances apply:
the deceased’s estate (aside from specific legacies of cash or assets that are not in the tax base) is left to charity; or the deceased’s estate is left to close relations only; and the net income of the estate while it is under administration is distributed; and the estate is transferred to the beneficiaries as soon as is reasonably practicable after the taxpayer’s death.
Roll-over relief will be available in relation to forestry assets of a taxpayer, both on the taxpayer’s death and on any subsequent distribution of the estate to beneficiaries, where the beneficiaries are close relatives of the deceased.
3. These exceptions will continue to apply where there are also specific legacies to third persons of assets that are not in the tax base.
4. Close relatives in these circumstances include relatives who are related to the second degree – for example, siblings, parents, children, grandchildren, grandparents, aunts and uncles.
5. A considerable number of consequential amendments to the Income Tax Act’s present treatment of death and distributions will be needed.
6. A number of specific proposals that address more technical issues will also be adopted:
The tax treatment of past deaths and distributions from trust and estates will be grandparented where: The tax base is protected by the position that was taken, either because the tax book values of the assets and liabilities were rolled over, or because a market value exercise was done. The beneficiaries of the trust or estate are limited to persons that are New Zealand resident for taxation purposes who are not exempt from income tax.
A special rule will be introduced to ensure that a taxpayer’s death does not in itself lead to an asset being brought into the tax base, merely because the ten-year period for land held on capital account has not elapsed. Ordinarily, land owned by certain people (such as land developers) is deemed to be on revenue account if it is disposed of within ten years of acquisition.
Tax will not be payable if such land passes to the deceased’s estate and on to an associated person of the deceased, where the land is held for the total of the ten years by the deceased, the estate and the beneficiary combined. A variation from the requirement to use market value will apply to unexpired accrual expenditure, which will instead be valued at cost less any amount amortised.
These assets are typically not held for resale, and valuing at cost should reduce taxpayers’ compliance costs. No use-of-money interest will be imposed in relation to a deceased individual’s tax liability in the year of death, so long as all tax due is paid by the due dates.