Death, Estates & Relationship Property Issues

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.”

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

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

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 2nd_{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