Most of you will have heard the term ‘Bright-line test’ being passed around in conversation, but how many people really understand what it means? This article explains what the bright-line test is and how it’s applied.
The bright-line test will apply to residential properties for which an agreement to purchase (note this isn’t settlement date) was entered into, on or after 1 October 2015. The bright-line test taxes residential property sold within two years of purchase. Property gains that meet the bright-line test will need to be included in an income tax return and will be taxed at ordinary marginal tax rates.
The key questions for most people are; when is the start and end of the two-year period? Put simply, the two-year period will run from the date of acquisition to the date of disposal. But, the date of acquisition and the date of disposal are defined differently to minimise opportunities to avoid the bright-line test.
The date of acquisition will generally be the date the title is registered with Land Information New Zealand (LINZ), whereas the date of disposal is proposed to be the date a sale and purchase agreement is entered into, even if it’s conditional.
To pre-empt your next question – yes there are exceptions to the bright-line test.
The primary exception to the bright-line test is the main home exception. This exception will apply when:
- The land has a dwelling on it;
- The owner occupies the dwelling; and
- The dwelling is the main home of the owner.
- If the property is owned by a trust, then the exception will apply when the dwelling is occupied (is the main home of) a beneficiary of the trust. If a settlor of a trust has a main home that is not owned by the trust – talk to us!
Other exceptions include inherited property and property under a relationship property agreement.
If your property sale is subject to the bight-line test, then you can claim expenses relating to the property, according to ordinary tax rules.
If your property sale is subject to the bright-line test and you sell it at a loss, the losses are ring-fenced and can only be used to offset other taxable gains arising from the sale of property.
LINZ and Inland Revenue are now able to collaborate on information collection. All parties to a property transaction will be required to obtain an IRD number and provide that number to LINZ as part of the transaction process
Basically, the Government has toughened up its approach on this issue. It has become much harder for people buying and selling property in the hope of making a quick gain, to avoid being identified and taxed.
If you think you might be caught by the bright-line test or you have any questions with regards to this article, please don’t hesitate to contact us.