New “bright line” test rules clarified

Detailed proposals on how the “bright line” test will be applied have been released in a consultation paper by the Inland Revenue Department (IRD).

The “bright-line” test – which will be applied to properties bought and sold within two years - is intended to help clarify whether or not gains on the sale of a property are taxable.

While gains from the sale of a property purchased with intent to resell are currently taxable, the IRD considers the “intention test” difficult to enforce due to its subjective nature.

The IRD paper states that the new “bright line” test will be unambiguous and objective.

This means that a residential property sale could now be taxable even if the seller did not acquire the property with the intent to resell or if they have to sell due to circumstances outside of their control, like a relationship break-up.

However, there are some exceptions to the rule.

These are when the property is the main home of the seller or, in certain circumstances like inheritance, when the seller did not intend to acquire the property.

Revenue Minister Todd McClay said the “bright line” test will bolster the tax rules on property transactions and help the IRD to better enforce them.

“The test removes any doubt about a seller’s ‘intention’ and makes it clear that all property buyers, including overseas buyers, who buy and sell a residential property within two years will be taxed on their gains.”

Besides detailing what property sales will be exempt from the “bright line” test, the IRD paper proposes new definitions of “residential land” and “main home”.

It also identifies what will be considered the acquisition and disposal dates of a residential property so that a seller and the IRD will know if the sale falls within the bright-line test.

The date of acquisition will be the date that a title is registered for the purchase of the property and the date of disposal will be the date that a person enters into an agreement for sale and purchase for the sale.

When it comes to sub-divisions, the date of acquisition for subdivided land by an owner will be the original date of acquisition of the undivided land by the owner.

This means that if the owner sub-divides and then sells a section of land more than two years after the original purchase of the property it won’t be subject to the “bright line” test.

But if the new subdivision is sold less than two years after the original purchase of the land it will be subject to the test.

NZ Property Investors Federation executive officer Andrew King pointed out that habitual renovators will also have the “bright line” test applied to them.

Anyone who frequently buys a home and does it up while living in it, then sells it for a profit is really running a trading business, he said.

“These people should be taxed under existing law, so the new test simply makes this clear. It states that if a home renovator buys and sells their home more than twice in a two year period, they will be deemed a trader and tax will apply on any profit they make.”

King said the “bright line” test is not aimed at people who buy a property to provide tenants with a home.

The IRD is seeking feedback on the consultation paper, Bright-Line Test for Sales of Residential Property, which can be read here.

The closing date for submissions is 24 July 2015.

Once public feedback on the proposed changes has been considered, the new rules will be included in a tax bill in September this year.

The “bright-line” test will then apply to residential properties for which an agreement to purchase was entered into on or after 1 October 2015.