Changes to the bright-line test including extending period to ten years
As part of Budget 2015, the Government announced that it would introduce a bright-line test, requiring tax to be paid on any gains from the sale of residential property, which initially applied to property bought and sold within 2 years, with limited exceptions (including sale of the main family home). In 2018 the bright line period was extended to 5 years while maintaining the other original policy settings.
In March 2021, the Government announced that the bright-line period would be extended to 10 years for residential property acquired on or after 27 March 2021. The rules relating to the exemption applicable to the main family home have also been amended.
With the changes announced in March 2021, there are now different rules that apply to residential property, including your main home, depending on if it was acquired before, or on or after, 27 March 2021.
Property acquired between 29 March 2018 and 27 March 2021
If a property was acquired on or after 29 March 2018 and before 27 March 2021, and is disposed of within 5 years, the bright-line rules will apply to the sale of the property and any gains made from the sale will be taxable unless an exemption applies. The exemptions applicable to residential properties acquired in this period include:
- Sale of the main family home (provided that most of the property has been used for the majority of the time it has been owned as the main family home of the owner)
- Transfer of the property upon death of the owner
- Transfer of the property under a relationship property agreement
Property acquired on or after 27 March 2021
If a property is acquired on or after 27 March 2021, and is disposed of within 10 years, the bright-line rules will apply to the sale of the property and any gains made from the sale will be taxable unless an exemption applies. The exemptions relating to transfer upon death of an owner, and transfers under a relationship property agreement will continue to apply. Properties which are ‘new builds’ will continue to be subject to the 5 year time period.
The exemption relating to a transfer of the main family home will also continue to apply in certain circumstances, however, ‘change-of use’ rules have been introduced, which will mean that tax on gains made on the sale of the property may apply if the property is not used as the owner’s main home for the entire time it is owned. If a property switches to or from being the owner’s main home during the time it is owned (with some limited short-terms exceptions) tax on a proportion of the gains made (calculated by the proportion of the time the property has not been used as the main home) will be payable.
• The definition of “residential land” covered by the bright-line test includes land that has a dwelling on it, land where the owner has an arrangement to build a dwelling on it, and bare land that may be used for erecting a dwelling under the relevant operative district plan. Residential land does not include business premises or farmland.
• The main home exemption (where applicable) is available to properties held in trust in some circumstances. However, people cannot use the main home exclusion for multiple properties held through trusts.
• The main home exemption cannot be used if it has already been used twice in the two year period preceding the date of disposal, and also cannot be used by a person who has a regular pattern of buying and selling their main home.
• Residential land withholding tax will apply to taxable sales by offshore persons (that is, vendors who are living outside New Zealand).
• Specific anti-avoidance rules remain to counter companies and trusts being used to circumvent the bright-line test.
• 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.
For further information on this topic and any other aspects of residential property, contact one of our experienced property lawyers.
Guides to the law
Here are links to the New Zealand Law Society law awareness pamphlets.