Extension of the bright-line test to five years
Tax Alert - March 2018
By Hiran Patel & Brendan Ng
Extension of the bright-line test
On 15 February 2018 the Government announced that the change to the bright-line test for residential property, to extend the period from two years to five years, would be implemented before the end of March. This change should not come as any shock, as the proposal was well signalled throughout Labour’s pre-election campaign, and is the first step in the Government’s crackdown on property speculation.
The proposed change has come via a Supplementary Order Paper to the Taxation (Annual Rates for 2017-18, Employment and Investment Income, and Remedial Matters) Bill (“the Bill”). The expectation is that the Bill will be enacted and in force by 31 March 2018.
What has actually changed?
Not a whole lot – the operation of the bright-line test will be exactly the same as it has been since it was introduced in 2015. This is of course except for the fact that the test will now cover a longer five year period instead of two. All of the existing exemptions and mechanisms around the dates of acquisition and disposal will remain (more on this later).
This means that residential properties ‘acquired’ before the date of enactment of the Bill will still be subject to the two year bright-line test. Any residential properties acquired after this point will be subject to tax if disposed of within five years of acquisition, unless an exemption applies. The rule only applies to residential land, being land which has a dwelling on it, land for which the owner has an arrangement that relates to erecting a dwelling, or bare land that may be used for erecting a dwelling under the rules in the relevant operative district plan.
What exactly is the bright-line test?
In his media release on the change, Minister of Revenue Stuart Nash stated that the “extension means that profits from residential investment properties which are bought and sold within five years will generally be taxable.” This is essentially the crux of the rule and it is intended to supplement the “intention test” (found in the Income Tax Act 2007) as an arbitrary line in the sand to determine whether a property was purchased for the purpose or with the intention of disposal (in which case it should be taxable).
As you would expect with a time based rule, the start and end date are absolutely vital. To this end, and to avoid any disputes, the Commissioner has issued a ‘Questions We’ve Been Asked’ covering this issue (QB 17/02, see our earlier article on this here). Generally, the start of the five year period is as follows (although there are also variations on the rule to cover different scenarios):
- The date on which the instrument to transfer the land to the person was registered under the Land Transfers Act 1952; or
- The date of acquisition of the land, if an instrument to transfer the land to the person is not registered prior to disposal.
The end of the bright-line period will generally be the date that the person enters into an agreement for the disposal of the residential land or the date the residential property is disposed of if there is no agreement.
The rules to determine the start and end dates for the purposes of the bright-line test slightly differ to the dates that are required to be used for the rest of the land disposal rules. For the bright-line test, given the latest possible date is used for the start date, and the earliest possible date is used for the end date, taxpayers can fall into a false sense of security when determining that they fall outside of the rules.
Are there any exemptions?
Like any good rule, there are exemptions, the most important of which is the “main home” exclusion. As the Government noted frequently throughout their pre-election campaign, they are not looking to tax the family home. The “main home” exclusion applies so that the bright-line test does not apply if the residential property has been used predominantly, for most of the time the person owns the land, for a dwelling that was the “main home” of the person. If a person has more than one home, their “main home” is the one with which the person has the greatest connection.
Like any exemption, there are carve outs. The “main home” exclusion will not apply where it has been applied by a person two or more times within the two years immediately preceding the finish date of the bright-line test or where the person has engaged in a regular pattern of acquiring and disposing of residential land.
Government crackdown on property speculation
The extended bright-line test supplements another measure focussed on property speculation, being the changes to bring residential land within the category of “sensitive land”, i.e. residential or lifestyle property (as proposed in late 2017 in the Overseas Investment Amendment Bill). The changes essentially mean that it will be more difficult for non-residents to be able to buy existing houses or other pieces of residential land, with the aim to make homes more affordable for New Zealand buyers.
The extended bright-line test and residential land proposals are likely to be the first of a number of changes by the Government as it focuses on efforts to reduce “property speculation”, so watch this space.