Snippets

IRD and close relationship transfers

Inland Revenue recently issued a draft interpretation statement regarding bright-line and its application to certain family and close relationship transactions. The publication relates to the 5-year bright line test for residential land purchased between 29 March 2018 and 26 March 2021, with a subsequent publication to be issued for the 10-year test applying from 27 March 2021. However, the expectation is that the conclusions reached will remain unchanged.

In essence, the publication confirms that no additional roll-over relief will be provided for close relationship transfers. Where there is a legal change in ownership taking place within the bright-line period, the sale will be taxable to the person disposing of it. Furthermore, all family and close relationship transactions that occur at below market value are deemed to have been transferred at market value. This may give rise to situations where tax is payable on an amount of income that was not actually received by the recipient.

For example, where parents dispose of residential land to their child within the bright-line period, the sale will be taxable to the parents based on the market value of the land, regardless of how much the child paid for it. Similarly, where a person wholly-owns land and wishes to become co-owners with their partner, a sale within the bright-line period is taxable but only to the extent that the land that is changing ownership i.e. no tax is payable on the share held by the original owner.

As a result, parents wishing to assist their children with buying residential property should carefully consider the ownership structure and alternate options before settlement – for example, could a loan be provided instead, or should nominee/bare trustee legal documentation be executed prior the original purchase to reflect the nature of the arrangement?

Is it confectionary or ingredient?

Here in New Zealand, we value simplicity and we call things as we see them. A spade’s a spade and a marshmallow is confectionary. However, over in the UK, things are a bit more complicated. Value Added Tax (VAT) is charged on goods and services (like GST is in NZ) but is subject to a number of fiddly and somewhat subjective exemptions. For example, supplies of food used for cooking are zero-rated, meaning no VAT is charged on these products. On the other hand, confectionary is subject to VAT at the standard rate, except for cakes and non-chocolate covered biscuits, which remain zero-rated. Clear as mud so far, right?

Innovative Bites Limited (IBL) is a UK supplier, distributor and wholesaler of candy. One of their products is called a ‘Mega Marshmallow’, a large marshmallow measuring 5cm x 4.5cm. According to the wholesaler, the product is supposed to be roasted over a fire, or put between two biscuits to make a s’more. Between 2015 and 2019 IBL sold these marshmallows with no VAT, on the assumption that their intended use fell within the “food used for cooking” exemption.

After being told they owed £470,000 in VAT, IBL appealed to the tax tribunal, asserting that their marshmallows were not confectionary as they were supposed to be consumed with other foods, or cooked before eating. When taking into account the packaging, the size of the product and where it was positioned in the supermarket aisle, the tribunal eventually agreed that the marshmallows were in fact not confectionary. In his conclusion, the judge stated that if a consumer wanted to eat marshmallows as a snack, they would likely eat smaller, regular ones.