Tax concessions are available for property transferred under a Relationship Property Agreement (RPA).
Subpart FB of the Income Tax Act takes the approach that the recipient steps into the shoes of the transferor, so that no tax implications arise with the transfer.
However, the parties and their advisers should take into account any deferred tax liability that may arise with a disposal in the future, in their negotiation of the relationship property split.
Examples of the tax concessions on a settlement of relationship property include:
- Where an investment property which has accumulated depreciation is transferred, the property is deemed to be transferred for tax purposes at tax book value and no depreciation recovery arises.
- Properties which would otherwise be subject to the 5-year bright line test are not affected if transferred under a PRA.
- Property on revenue account (property taxable on disposal) transferred under a PRA will not trigger an income tax liability as the property is deemed to be transferred at cost.
- Where shares are transferred, there is no effect on shareholder continuity that may affect imputation credits or tax losses. Shares in a look through company can be transferred under a PRA without a disposal of an interest in the LTC such that no income tax liability arises.
To be valid, PRA’s must to be signed and witnessed by solicitors for each party, who certify they have explained the implications to their client. You can expect the lawyers to spend some time to understand all of the assets and division to be able to properly advise.
A significant tax change occurred in 2016 when the concessions were widened to apply to property transferred to or from persons associated to the parties to the agreement. This change covers resettlements of trusts where each trust is associated with a party to the PRA, and transfers of property to and from companies that are associated with one of the parties.
For example, a joint trust could transfer an investment property to a new trust for one of the parties, and the tax concessions in subpart FB apply.
This gives rise to potential tax planning opportunities:
As you are probably aware, PRA’s can be undertaken as ‘prenups’, on dissolution of the relationship, or during the relationship to rearrange property ownership.
Parliament has recognised that modern relationships hold assets in a variety of ownership structures, and that transfers to and from entities associated with the parties to a RPA should be able to use the tax concessions. When a restructuring is recommended to a family structure, advisers should consider whether a RPA can be incorporated to mitigate adverse tax implications that might otherwise arise. Of course, advice should include an assessment of the potential application of the anti-avoidance rules in the particular circumstances.