Death, Estates & Relationship Property Issues Prepared & Presented by nsatax Limited Disclaimer This Seminar is of a general nature only. Please obtain specific advice on client situations as minor changes in facts may result in significantly different outcomes. This Seminar does not purport to cover all aspects of tax law relevant to the topics covered. Death and Taxes Death is a very dull, dreary affair, and my advice to you is to have nothing whatsoever to do with it. W Somerset Maugham I'm not afraid to die. I just don't want to be there when it happens. Jerry Seinfeld
Trusts Many clients now have asset owning trusts Death should not have any tax issues Memorandum of wishes may result in trust being wound up or assets distributed which may have tax consequences Trust may simply carry on Only issue on death may be debt forgiveness Estates and Income Tax No estate duty or inheritance tax in NZ Income tax return required to date of death, unless not a filing taxpayer Executors are responsible for ensuring deceased s tax affairs during lifetime are met Estates and Income Tax IR3/IR5 to DOD filed under deceased s IRD number Returns after date of death- executor is a new taxpayer and needs new IRD number File IR6 (trust return) Estate must file tax return even if no income
Estates and Tax Any tax liability of deceased assessed after DOD is deemed a liability incurred during deceased s lifetime and executor is responsible for payment of tax Executor has an indemnity out of the assets of the estate to discharge any of the deceased s liabilities, including tax Estates Recovery of Tax After Estate Distributed CIR can reopen back year assessments after estate distributed, subject to 4 year time bar Executor is responsible for tax Executor can recover from beneficiary amounts paid to IRD for debts owing by deceased If serious hardship for beneficiary, CIR can release executor from liability and amend assessments Tax Return to Date of Death Adopt the same basis of tax treatment the deceased had during their lifetime; obtain a copy of last income tax return Include in the tax return to DOD all income derived during the period from last balance date to DOD Apply normal tax principles to determine income derived
Salary and Wages Salary/wages as employee include only salary paid before death in return to DOD Holiday pay -If received during the period to DOD include in deceased s return, but if accruing at DOD and paid out after, include in estate return as trustees income Dividends and Rent Dividends. Include all dividends declared to be payable prior to DOD in the deceased s return to DOD Rental income IRD regard rental income as accruing on a daily basis so include rent accrued to DOD in deceased s return to DOD Interest Interest if deceased was cash basis person (CBP), derived when received, otherwise on an accrual basis If CBP- Trading bank interest calculated on a daily basis Fixed term investments amount accrued at DOD but derived later by trustees - include in trustees return
Payment to Deceased s Spouse/Dependants If employer makes an ex gratia payment to the surviving spouse/dependants within 12 months of date of death, not taxable to recipient Tax Losses Tax losses of deceased remain with deceased and are not able to be used by the Estate or beneficiaries of the Estate State Benefits Student loans owing written off after presenting death certificate to IRD Child Support owing estate is liable. If insufficient assets is written off Kiwisaver paid to estate
Death of a Sole Trader Business income deemed disposal of trading stock at market value unless spousal exception applies Bad debts debts which are proved irrecoverable at DOD and which the deceased could have written off are allowed as a deduction in the return to DOD Deduction for fixed charges - apportion fixed charges, such as rates, insurance etc on a proportionate basis to DOD Death of a Shareholder No breach of shareholder continuity on death providing shares pass to beneficiary under the deceased s will Includes a trust under the will Therefore will not affect tax losses or imputation credits Death of a Shareholder Current account if forgiven by will, results in accrual income to the company If deceased s current account passes under Will no accrual income
Qualifying Companies Qualifying companies to maintain status election within 12 months from date of death by the executor and one sui juris beneficiary. Can apply for extension of 12 month period If deceased was just a director, death does not affect the status of the qualifying company Look Through Companies Shareholder of look through company dies Part FC applies in normal way with market value disposal unless exception applies Income Tax Rules on Death Part FC of the Income Tax Act 2007 covers transmission to executor and transfer by executor to beneficiaries Basic rule is that there is a disposal at market value at DOD and market value disposal at date of transfer to beneficiaries Several exceptions
Surviving Spouse Exception Exception where property transferred on death to surviving spouse, de facto or civil union partner. Applies to both transmission and transfer However, does not apply to tax base property if a person who is not a close relative is beneficially entitled under the estate to tax base property What is tax base property? Surviving Spouse Exception If surviving spouse exception applies, the transmission on death and transfer to the beneficiary is treated as a transfer under a settlement of relationship property (i.e. a roll over) Close Relatives and Charity Exception Exception to market value rule on the transfer by executor to beneficiaries of tax base property, providing the only beneficiaries are close relatives or a charity. Note only roll over at the second stage, no roll over at DOD
Other Issues Impact of shareholder agreement Disposal of shares Share buy back Debit shareholder current account Insurance proceeds Shares issued under an employee share plan Share options Estate Tax Issues Estate Tax Return Specific legacy income derived from DOD to date of distribution is taxed as beneficiary income (doctrine of relation back) Residuary estate income is taxed as trustee income First return from DOD to 31 March Executors taxed as a trustee
Estate Tax Return Need to consider treatment of life interest in estate income Tax return required to date of final distribution Estate Tax Return Specific legacy taxed in beneficiary hands Income retained in the Estate is taxed at 33% Distributions of the residue taxed in beneficiary hands Executors can elect to pay tax on beneficiary behalf Estate Tax Return The estate may hold residue of Estate Often spouse may have a life interest in the net income of the Estate Beneficiary income is income which vests absolutely to a beneficiary Treat net income as beneficiary income
Executor and Accrual Rules An executor is able to be a cash basis person if the deceased was, so long as the estate satisfies the criteria Lasts for income year of death plus next four income years Minor Beneficiary Rule Distributions of income to minor beneficiaries (under 16) are taxed @ 33% Exception for trusts created by Will Minor must be alive within 12 months of settlor s death or has a sibling alive within the 12 month period Executors / Trustee Liability If a beneficiary does not return income distributed from an Estate the executors/trustees could find themselves liable for the tax as agent Prudent to pay tax on the beneficiaries behalf
Associated Persons and Land Our view is the deceased is not associated with executors Executor/trustee will not be associated with beneficiary as beneficiary is not a settlor nor holds the power of appointment Beneficiary will not get benefit of deceased s ownership period under CB 15 for the purposes of the 10 year rule Inheriting From A Foreign Estate Dealt with under NZ trust rules Inheritance will be a distribution from a foreign trust Normally ordering rules apply to distributions Deemed sourced from current year income, then accumulated income, capital gains and corpus Inheriting From A Foreign Estate However the ordering rules do not apply to fixed distribution from a will trust Client often say they are getting an inheritance from a relatives estate It is really a distribution from an overseas trust Need to be clear where the distribution is coming from
Memorandum of Wishes Trusts may own assets Tax consequences if trust assets distributed or resettled Treat as a SALE Disposal at market value No roll over relief GST to consider GST and Estates If deceased was GST registered, executors step into their shoes Executor must notify IRD within 21 days of death Executor is personally liable for GST post DOD, but not for period to DOD GST and Estates If transfer assets of a GST taxable activity to a non GST registered beneficiary, supply is at market value If to a GST registered beneficiary the supply could be zero rated (CZR or a going concern), or since the parties are associated the transfer can be at consideration allocated on transfer eg if nil then no GST
GST and Estates If deceased/executors were not GST registered and beneficiary will use assets in a taxable activity the beneficiary will not be entitled to a 2 nd hand goods input claim No cost on an inheritance (Wilkie v CIR (1998)) Property Relationship Issues Property Relationship Issues There can be many issues to consider from a tax perspective Can be complicated due to ownership structures Need to look carefully at who owns the relevant property Agreement reached by individuals may not be relevant where property owned by other entity eg a company or a trust
Property Relationship Agreements Concessionary provisions in Part FB deal with transfers of property under relationship agreements If applicable transferee steps into shoes of transferor for tax purposes Generally transferred at cost and same date as acquired Agreements can apply where no relationship separation Income Tax Part FB When this subpart applies This subpart sets out the tax treatment when property is transferred on a settlement of relationship property General treatment of parties to agreement The tax consequences for the transferee on a settlement of relationship property are the same as if the transferor had continued to hold the property Meaning of settlement of relationship property A settlement of relationship property means a transaction between parties to a relationship agreement that creates a disposal and acquisition of property under this subpart Property Relationship Act Spouses or civil union partners or de facto partners may, for the purpose of settling any differences that have arisen between them concerning property owned by either or both of them, make any agreement they think fit with respect to the status, ownership, and division of that property
Trusts & Property (Relationships) Act Transfers Income tax concessions only apply to the parties to a PRA, and only the couple can dispose of relationship property Conventional view is that this is not available to trustees even if a party to the agreement Trusts & Property (Relationships) Act Transfers Therefore, apply the normal rules to property transfers to and from trusts If sale or distribution/resettlement of property: Possible share continuity breach Depreciation recovery Revenue account property trigger Common Areas Applies to continuity provisions So no ICA issues or loss carried forward issue if shares transferred under RPA Transferee also takes over intention of transferor Eg Dad is a share trader and transfers some shares to Mum under a RPA What are the issues?
Common Areas Where shares of LTC transferred Transferee deemed to acquire when transferor acquired the shares so no apportionment of income or losses on a daily shareholding basis Common Areas Depreciation concession No depreciation recovered Transferee takes over any depreciation recovered liability Need to watch if acting for spouse taking over rental property where depreciation previously claimed Common Areas The financial arrangement rules do not apply to RPA So default concession applies Transferee may have BPA income on disposal Eg Dad buys bond with a face value of $100k for $85k. Bond acquired by Spouse. The spouse will be taxed on $15k when bond matures
GST If a GSTable asset there will be a deemed disposal at market value Need to look at the registration status of the recipient If recipient is GST registered and using asset in taxable activity no consideration so no GST issue otherwise GST payable by transferor at market value GST If transferor not GST registered then no GST issues However if transferee later uses assets in taxable activity Second hand good claim is based on cost which is nil so no claim Change of use rules will again give no input claim as cost nil Any Questions?