1. Brightline Test
- If the property was purchased on or after 1 October 2015, and the date of the shareholding change is less than two years from that date, then there will be tax to pay under the Brightline Test.
- Even if the property was purchased before this date, or you are outside the two year period, you need to be aware that any shareholding change now will restart the Brightline Test start date, at least for part of the property. In other words, if there is a shareholding change, then any subsequent sale of the property or change of shareholdings within 2 years of the date of the change will be partially taxable.
2. Shareholders Current Account
Bob has 99 shares, and Mary has 1. Bob will sell/transfer 49 of his shares to Mary so that they each have 50 shares. Let’s say at the moment, Bob and Mary are owed $75,000 each by the company.
The LTC has made losses so is technically “insolvent”. The ramification of this is that as 49% of the shares are transferred there is a deemed disposal of 49% of the both advances being a total of $73,500 at a market value of zero (due to the company being insolvent).
Under special tax rules the $73,500 is initially deemed to be income of the LTC to be taxed to the owners in proportion to their shareholding (Bob $72,765 and Mary $235). Under soon-to-be-introduced income tax rules, this income will not be taxed to the extent it is in proportion to shareholding. In this example Bob has debt of 50% for a shareholding of 99% and Mary has debt of 50% for a shareholding of 1%. Under the new rules he will be taxed on 49% of the debt being $73,500 and Mary will not have taxable income.
In this scenario, the de minimis* threshold of $50,000 would be exceeded when Bob transfers his shares (as the deemed income is $73,500). This same issue arise when either the LTC status is revoked or the company is wound up.
Going forward, ideally all LTC shareholder debt should be in proportion to shareholding. Between family members this can be achieved by way of an assignment of debt as that is another way of presenting what is happening. Then going forward debt should be transferred along with shareholding so the debt stays in proportion.
The new rules are expected to be passed in the next few months. After that we will be working with you to align debt with shareholding wherever possible to avoid this problem.