In August this year, the Government introduced the “Bright-line test” which is taxing residential land bought and sold within 2 years on and after 1st of Oct 2015.
The test only applies to “residential land”, but, the person’s “main home” “inherited land”, or land acquired under a “relationship property agreement” will be excluded from this rule.
Below is a summary of officials’ suggestions for the design of the bright-line test.
The suggested bright-line test will apply to properties for which an agreement for sale and purchase is entered into from 1 October 2015, and which is subsequently disposed of.
When the property was acquired other than by way of sale, the suggested bright-line test will apply to properties for which registration of title occurs after 1 October 2015.
Let’s look at some examples:
Q: Andrew buys a rental property in February 2015 and sells the property on 1 April 2016. Is the sale subject to the bright-line test?
A: No, because the property was purchased before 1 October 2015.
Q: Helen buys a rental property and gets registered title to the property on 15 November 2015. She rents the property out. She decides to accept a very good offer for the property and enters into an agreement to sell the property on 1 August 2016. Is Helen subject to the bright-line test?
A: Yes, the property has been bought and sold within the two-year period measured from 15 November 2015 to 1 August 2016, being the relevant dates. Helen must include the gain on the sale of the property in her income tax return for the 2016–17 tax years.
Q：Deepak enters into an agreement to buy a bare section in a planned subdivision on 1 December 2015. The purchase of the section is due to settle (with title passing) in December 2018. Deepak enters into an agreement to sell his interest in the property to a third party on 10 December 2016. Is Deepak subject to the bright-line test on the sale of his interest in the property?
A：Yes, Deepak has sold an interest in bare land that because of its area and nature is capable of having a dwelling erected on it. As Deepak has not had legal title to the land transferred to him at the time of sale, the additional rule for “off the plan” sales applies. The relevant 2-year period for “off the plan” sales is from the entering into of the contract to buy (1 December 2015) until the entering into of the contract to sell (10 December 2016). The bright-line test applies in this example because the period is less than 2 years.
Q: Jane is a student from England studying in New Zealand. Her English resident parents have purchased an apartment on 1 December 2015 in Auckland for her to live in while she is studying in New Zealand. After one year studying, Jane decides to return home and her parents sell the apartment on 30 January 2017. Are the parents subject to the bright-line test on the sale proceeds?
A: Yes, the apartment has been bought and sold within two years and the main home exception does not apply because the owners have not used the property as their main home during their period of ownership.
Q: Andrew and Bill buy a two-storey property with a dwelling on the top floor and a larger shop on the ground floor on 1 November 2015. They rent out the dwelling and operate a business from the ground floor. Their circumstances change and they sell the property on 1 July 2016. Are they taxable under the bright-line test?
A: No, the property has predominantly been used as business premises and is therefore not subject to the bright-line test.
Q: Rose owns a large property in Wellington, which he bought in 2010. In December 2015, he decides to subdivide the property and sell off the back section. Is Rose liable for tax on the sale of the back section under the bright-line test?
A: No, the acquisition date for the subdivided section is the original acquisition date for the property (being 2010).
Q: Manu buys a property on 1 November 2015 as his main home. Three months later, he is made redundant and needs to leave town to get a new job. He sells his property and moves to a new town for his new job. Is Manu taxable under the bright-line test on any gain on the sale of the property?
A: No, the main home exemption applies to the property because Manu has occupied the property mainly as his residence during his ownership.
Q: Andrea buys a Christchurch property on 30 December 2015 intending to use the property as her main home. Six months later, she takes a secondment position in Sydney for two years. She rents out the property after she leaves. She decides to sell her Christchurch property 12 months into the secondment. Is Andrea taxable under the bright-line test on any gain from the sale of the property?
A: Yes, the main home exception does not apply because she has not occupied her Christchurch property as her main home for the majority of the time she has owned the property.
Q: Jean buys an investment property on 1 November 2015. She dies on 1 March 2016. The property passes to the executor of Jean’s will and subsequently to her daughter, Mary. Mary sells the property on 30 April 2016. Is Mary liable under the bright-line test for tax on any gains on the sale?
A: No, the exception for inherited property applies.
Q: Jack and Jill get married in June 2015 and purchase a house and a rental property together on 15 December 2015. Six months into the marriage they decide to separate. Jill gets the house and the investment property under the relationship property agreement. Jill continues to live in the house as her main home. She decides to sell the house and the investment property in July 2016 (i.e. within two years of purchasing the properties). Is Jill taxable under the bright-line test?
A: Jill will not be taxable on the sale of the house because it has been her main home for the period she has owned the property (either jointly or subsequently on her own). The sale of the rental property will be subject to the bright-line test because it has been bought and sold within two years.
The intention of purchasing the residential land still applies as the main rule of determining whether to tax the property transaction. If the intention of the purchase is to do up a property and sell it, even if it is outside of the two years period, it will be still taxable.
The changing rule of date of acquisition
Currently it is the date of the agreement of sale and purchase that is recognized as the date of acquisition, the new rule will change to the date of the title registration for most cases, the two year period will be calculating from the registration date for all agreements signed on and after 1st of Oct 2015.
From 1 October, buyers and sellers will need to provide their IRD numbers and other tax information, except where a sale relates to the main home. Persons classified as “offshore persons” will need to also maintain a New Zealand bank account. Non-residents having to provide foreign tax identification numbers will also allow for better information sharing between Inland Revenue and their home jurisdictions.