Government proposes changes to bright-line test

The Government is proposing to extend the “bright-line test” period from two years to five years. The bright-line test taxes the gains made on the sale of residential land.

The changes are expected to come in to force in March 2018.

Reduced number of property “speculators”

The Government has introduced the changes as an attempt to reduce the number of property speculators in the residential property market, and to increase the ability of first home-buyers to enter the market.

New Zealand’s tax rules contain various provisions that may tax gains arising from the sale of land.  The bright-line test will only apply in situations where the other land-tax provisions do not apply to the sale in question.

Changes to when gains are taxable

If a residential property is sold within five years of its acquisition, the vendor may be required to pay tax on the gains from that sale under the bright-line test. The five-year period will usually begin on the date that title to the property is transferred to the person, and end when the person enters into an agreement (including a conditional agreement) to dispose of the property.  This is a deliberate design feature of the bright-line test, to prevent a seller from delaying settlement of a property transaction to avoid a tax liability.

For an off-the-plan acquisition, the five-year period is calculated slightly differently. In this scenario, the five-year period begins at the time that the person acquires the interest in the land (usually upon the completion of a land development project or subdivision), and ends when they enter into an agreement to dispose of the land.

The bright-line test only applies to residential land (including bare land that may be used for residential purposes), and not to business premises or farmland.  Importantly, the bright-line test does not apply to a person’s main home, or to transfers of relationship property or inherited property.

If a residential property is sold at a loss under the bright-line test, the loss will be ring-fenced and can only be used to offset taxable gains from future land sales.  The total deduction that a taxpayer can claim in an income year will be capped at the amount of income that the person has under the bright-line test for that year plus any other income the person has from land sales in that year.

The residential property market may be affected

In a regulatory impact assessment, the IRD has identified three potential unintended impacts of the changes:

  • investors may inadvertently be caught by the changes in instances where they did not acquire the land intending to resell it;
  • to avoid being caught by the bright-line test, people may be discouraged from disposing of residential property, possibly resulting in a drop in supply for a period of time; and
  • a reduction in speculators selling their residential land may lead to lack of supply of rental properties, therefore leading to increased pressure on the rental market.

If you have any questions or are concerned about how these changes may affect you please get in touch with us and we will be happy to assist.

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