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Property Tax Changes - Bright-line Rule Now Law

30 November 2015

It is old news that property speculation in the Auckland market has been rife and that this is one reason for the escalation in property prices. One prong of attack in the Government’s plan to reduce property speculation is the introduction of the “bright line” rule (or “bright line” test) for residential property sales.

The “bright line” rule

The new law means you must pay income tax on gains you make on the sale of a residential property which you buy after 1 October 2015 and sell within two years of buying it – unless you qualify for one of the exemptions.

The bright line rule adds to and does not replace the existing tax rules. For example, under existing rules you must pay tax on any gain made on property you buy with the intention of selling it for gain. The problem with the “intention test” is that it is difficult to enforce because it is hard to prove what your intention was when you bought the property. It is also difficult to enforce in relation to residential property because of the high volume and churn in the market. A bright line test provides a clearly defined rule which leaves little or no room for varying interpretation. There is no room for argument as to whether the gain is taxable or not. You’re either selling in the two year period or you’re not. The law includes anti-avoidance rules so companies and trusts can’t be used to circumvent the bright line rule.

Bright line rule only applies to residential land

The bright-line test applies only to residential land. Residential land 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 can have a dwelling erected on it. It does not include business premises or farmland. Farmland means land that is either being worked on, or is capable of being worked on, as part of a farming or agricultural business. You may need to take professional tax advice if you are not sure whether the land you are selling could be classified as residential, business premises or farmland.

Exemptions

You will not have to pay tax under the bright line rule if you sell your property within two years of buying it if:

  1. It is your "main home" (unless you have sold your main home more than twice in the previous two years) (Residential land owned by a trust can qualify for the main exemption in some circumstances)
  2. You inherited the property
  3. The property is being transferred as part of a relationship property settlement (you will be liable under the bright line rule if you subsequently sell the property within two year of the date it was originally purchased by you and your spouse or partner, unless it is your main home)
  4. You are transferring the property as an Executor of an Estate

Good news or bad?

Although the changes have generally been welcomed because they are expected to improve compliance with existing tax laws and dampen property speculation, there are downsides. The new law will add to the complexity of our existing tax laws. Although there’s no room for argument about the two year bright line test, there may be room for argument about the interpretation of other aspects of the new law – for example, whether you’re selling residential land or farm land or whether you qualify for the main home exemption. For many their position under the new laws will be simple, but for others the complexity of the rules will mean the need for professional advice.

 

Please email me at barbara.mcdermott@nwm.co.nz with your ideas for future articles. Keep an eye out for next month's column, where I will discuss another relevant rural legal issue.


Barbara McDermott is a partner of Norris Ward McKinnon, specialising in commercial and rural law. With offices in Hamilton and Huntly, we have friendly, expert legal advisors ready to help you with your business and personal legal matters.