The bright-line test came into force on 1 October 2015. When the legislation was at Bill stage it was signalled that the bright-line test was intended to come into force on 1 October 2015, as was the case.
GG & GE Blackburn Trustee Limited (the Trustee) is the trustee of the Blackburn Family Trust (the Trust).
On 31 March 2016 Mrs Blackburn (who was also a director of the Trustee) sold a residential property that she owned on Waiheke Island to the Trust. The purchase price was $2.85m.
The following year the Trust sold the property to a third party for $5.2m. The bright-line test applied, which meant that the Trust was assessed for income tax on the increase in value, which resulted in a tax impost of $774,984.21.
Editor’s note: now that gift duty is no longer a consideration, property is commonly sold to trusts without a registered valuation, with value being set by reference to government valuation, which commonly is not a fair reflect of the value given that these are only up-dated every three years. It is not clear whether that is the case here. However, the decision does serve as a reminder to ensure that property acquired by a trust is correctly valued (both at acquisition and regularly thereafter) so that that trustee is fully appraised of the value of the trust’s individual assets.
The Trust has been advised by Crowe Horwath since 2013.
The Trust sought summary judgment against Crowe Horwath in the amount of the tax payable to Inland Revenue and fees charged by Crowe Horwath.
Prior to the sale of the Waiheke property, the Trust’s lawyer gave advice regarding the bright-line test and the value of the property pursuant to a CV. As noted in the judgment at :
 The documenting of contracts and transfer documents for two properties (the Waiheke property being at Tawa Street and another property situated on Tamaki Drive, Auckland) was to be attended to by Mr Smith of Gaze Burt. The new tax legislation creating a bright-line test for capital gains came into effect and the 1 October 2015 date passed without completion of the transfers. On 20 January 2016, Mr Smith sent an email to Mrs Jacobs stating:
Due to the recent Auckland price increases, the CV of the property may be on the low side. This will, however, only create difficulty if you sell Tawa Street within 2 years of the date of its transfer to the Trust. This is because the new two-year brightline test (which you may have read about in the media) will require that you pay tax on the capital gain and a low purchase price may mean more tax to pay when the property is sold.
This will not be the same problem with Tamaki Drive, as there is a main home exclusion to the 2 year brightline test and I understand that your mum uses that property as her main home.
If you are considering selling Tawa Street within the next 2 years, then perhaps it should not be transferred to the trust. Alternatively if you do not think you will sell the property but, just in case you do sell, then it might be best to obtain a registered valuation in order to document a higher purchase price.
This e-mail was copied to Crowe Horwath.
Whether the Trust actually suffered a loss (notwithstanding the disappointment of the assessment for income tax) was not determined in the judgment. As noted at :
 [Crowe Horwath] provided an affidavit of Ms Keeling, a registered valuer. Ms Keeling analysed transactions comparable to the April 2017 sale and provided her opinion that the Property had a value of $3,650,000 at the date of sale. On that basis, Ms Woods submitted that the Trust, rather than incurring a loss through selling the Property at the time it did, was better off than it would have been if it had retained a property worth Ms Keeling’s ascribed value.
Summary judgment was not granted. This means that the matter has not been determined either way.
The case highlights the importance of treating sales to trusts as sales at correctly identified market value; and in recognising the potential tax implications of a sale to a trust where there is an on-sale that the bright-line test applies to.
- GG & GE Blackburn Trustee Limited  NZHC 366
- Taxation (Bright-line Test for Residential Land) Act 2015