Recent changes to the Bright-Line Test: implications for Family Trusts

By Emma Marshall

29 August 2021

The Bright-Line Test (“BLT”) applies to sales of residential land making capital gain on sales taxable at the seller’s normal income tax rate if disposal occurs within a certain “bright-line period”.  Trustees need to be aware that transfers of residential property to and from family trusts are captured.

In March this year the Government extended the bright-line period for residential land to 10 years and made other significant changes.

The main home exclusion (“MHE”)

Under current rules the MHE will apply to trusts where the property was the main home of a beneficiary of a trust, if:

• the person disposing of the land is a trustee of the trust and a principal settlor of the trust does not have a main home; or
• if a principal settlor of the trust does have a main home, it is that main home which is being disposed of.

In this context a principal settlor means a settlor whose settlements to the trust are the greatest, or greatest equal, by market value.

However, the MHE does not apply if the person:

• has used the MHE two times or more within the two years immediately preceding the bright-line date (disposal date) for the residential land; or
• has engaged in a regular pattern of acquiring and disposing of residential land.

Under the 2021 amendments the MHE (whether in the trust context or otherwise) will no longer apply on an all or nothing basis. Instead, except for an allowed change of use buffer period, it will apply only for the period the property is used as the person’s main home.

Rollover Relief

To clarify the position regarding family trusts and the BLT, the Government has indicated it intends to provide rollover relief from BLT in certain instances where residential land is settled on a family trust, applicable to transfers of residential property on or after 1 April 2022. It is currently seeking submissions to determine how and when such rollover relief should apply.

Get professional advice

If you are considering making changes to the ownership of trust property, specialist legal and tax advice will be required to avoid unintended and costly tax consequences.

Talk to us

If you would like more in-depth advice or further information about the content of this article, please get in touch with the team at Pitt & Moore on 03 5488349, and ask to speak Emma Marshall, Partner.

Disclaimer: The information contained in this publication is of a general nature and is not intended as legal advice. It is important that you seek legal advice that is specific to your circumstances.