The Bright-Line Test - A Snap Shot


The Bright-Line Test-  A Snap Shot

The bright-line test was introduced by the previous National Government in the budget of 2015.  It came into effect for residential property that was acquired on or after 1 October 2015.  The following is a snap shot of the key points:

  • The bright-line test when first introduced required income tax to be paid on any gains from the sale of residential property that is bought and sold within a period of 2 years, with limited exceptions, including the sale of the main family home, transfers upon death, or a transfer under a relationship property agreement (“exceptions”).
  • As part of its policy announced during the election campaign, the current government has extended the period of the bright-line test from 2 years to 5 years.  The extension of the bright-line period to 5 years does not to change any of the other policy settings supporting the original bright-line test including the exceptions.
  • As a result of the latest changes income tax is to be paid on the gains from the sale of residential property bought and sold within 5 years, subject to the exceptions.
  • The 2 year bright-line test will continue to apply to residential land if a taxpayer first acquired an interest in the residential land on or after 1 October 2015, but before 29 March 2018.
  • If a taxpayer first acquires an interest in residential land on or after 29 March 2018 the 5 year bright-line test applies on disposal.
  • The rules around the “first date of acquisition” and the “date of disposal” are not straightforward and taxpayers may be caught without realising that their sale may be subject to the bright- line test.
  • The main home exception is available to properties held in trust.  However, people cannot use the main home exception for multiple properties held through trusts.
  • The main home exemption cannot be used if it has already been used twice in a 2 year period preceding the date of disposal, and it also cannot be used by a person who has a regular pattern of buying and selling their main family home.
  • Specific anti-avoidance rules remain to counter companies and trusts being used to circumvent the bright-line test.
  • Residential land withholding tax will apply to taxable sales by offshore persons (vendor’s who are living outside of New Zealand) and complex rules apply to trusts that undertake taxable sales, with these rules relating to distributions made to beneficiaries who may be outside of New Zealand).
  • Vendor’s will continue to be allowed to deductions for the sale of property subject to the bright-line test according to ordinary tax rules.
  • Losses arising from the bright-line test will remain ring fenced so they may only be used to offset taxable gains from other land sales.