Recent change to the bright-line test
The new rules around the bright-line test have been hard to miss in recent days, but what do they mean for the average person buying a residential home to live in? The bright-line test has been amended over the years and as such, there are three different rules to consider depending on when you purchased your residential property.
For a residential purchase between 1 October 2015 and 28 March 2018, the bright-line period was just two years; this test is now no longer relevant because if you were to sell your residential property today, it would be outside of the applicable bright-line period. If you purchased your residential property between 29 March 2018 and 26 March 2021 the bright-line period now runs for five years. For the most recent change on March 27 2021, purchasing a residential property will bring you under the new 10 year bright-line period. Knowing which bright-line period applies to you is just the first hurdle.
Understanding the ‘main home’ exclusion test is a key factor in ascertaining whether you may be caught by the bright-line test. The ‘main home’ exclusion can only be used when the residential home being sold (before the expiry of the 10 year period) has been used solely as a main home for the whole of the bright-line period, i.e. from the date of settlement to the date of disposal. This exclusion is extended to those that have inherited a residential home or are holding the title to residential property as the executor of an estate.
However, do not be fooled by the seemingly simple use of this exclusion as it comes with some catches. You cannot use this exclusion if you sold your main home two or more times within the two years immediately prior to the bright-line period, or if you have engaged in a regular pattern of acquiring and disposing of residential land.
And that is not all. Consideration then needs to be given to a further ‘property sale’ rule – your intention when you bought the residential property. If from the outset you had a firm intention to resell the property to make a profit, then you will be caught by the bright-line test.
We will assist you with correctly completing the required Land Transfer Tax Statement when you buy and sell residential land; they can also check the date you purchased the land to see which bright-line period relates to your situation. The details from the Land Transfer Tax Statement are uploaded to Land Information New Zealand. The information is collected on behalf of the IRD, who are actively making sure property tax obligations are being met.
The IRD website has a Property Tax Decision Tool online, if you wish to check your situation yourself. Otherwise, if you are selling your residential property and believe you may be caught by the bright-line test, you can talk to an accountant about how to correctly note this in your upcoming tax return.