By way of reminder the Brightline rules tax the profit on residential property in certain situations.
Land-rich companies and trusts are subject to anti-avoidance rules to stop taxpayers using these entities to step around the Brightline rules. A land-rich company or trust is one where at least 50% of the value of the company or trust is attributed to residential land either directly or indirectly.
In general, shareholding changes or trust deed changes do not have an impact on the Brightline rules however for land-rich companies and trusts this may not be the case for properties purchased within the brightline period (5 or 10 years).
For land-rich companies, the specific anti-avoidance rule deems a shareholder to have disposed of residential land when 50% or more of the shares in the company are disposed of within a 12 month period and the disposal of the shares had a purpose or effect of defeating the intent and application of the brightline rules.
It should be noted that the above company rules do not apply to look-through companies (LTCs). LTCs are taxed as a partnership and as such the brightline rules for LTCs apply to the shareholder rather than the LTC itself. The impact of the brightline rules on the shareholder will depend on the tax status of each shareholder (Company, Trust or Individual etc).
Turning to land-rich trusts, the specific anti-avoidance rule deems the trustees to have disposed of residential land when there is a change to the trust’s deed, a decision-maker under the trust deed, or an arrangement under the trust deed, and the change had a purpose or effect of defeating the intent and application of the brightline rules.
In summary, if your company or trust is land-rich, please keep the above rules in mind when making shareholding or trust deed changes. We recommend talking to us before making any changes.