Buying Or Selling A Property? The Bright-Line Test And Its Impact On You
Introduced to New Zealand in 2015, the bright-line test originated as an attempt to tighten rules around property investment. Since then, New Zealand’s housing crisis has worsened which has resulted in the government’s recent changes to the brightline test.
What Is The Bright-Line Test? Essentially, the bright-line test enables the Government to charge income tax on any profit that is made when a property is sold within a stipulated time frame. The bright-line period begins on the date that the property’s record of title is registered with Land Information New Zealand and ends when you enter into an unconditional Sale and Purchase Agreement for the sale of the property.
Key Time Frames In determining what bright-line test applies to, you need to determine when the property was acquired. This is generally the date you signed the sale and purchase Agreement.
If you acquired the property: • before 1st October 2015, the bright-line test does not apply. • between 1st October 2015 and 28 March 2018, the 2 year bright-line test applies. So if you sell within 2 years you will pay tax. • between 29 March 2018 and 26 March 2021, the 5 year bright-line test applies. So if you sell within 5 years you will pay tax. • after 27 March 2021, the 10 year brightline test applies. So if you sell within 10 years you will pay tax.
Exemptions To The Bright-Line Test Family Home The bright-line test generally does not apply when the property you are selling is your main family home. Essentially, this means you will not be taxed on any profit that is made.
If you acquired the property before 27 March 2021 and you used the property for 50% of the time as your main family home then the exemption applies, and you do not have to pay tax. If you acquired the property after 27 March 2021 the rule slightly differs. If the property is used in a way that is not for the family home for more than 12 months, then you will have to pay tax proportionately on the time the property was not used as your family home.
Whether your property is classified as your main family home is not always clear cut. For this reason, it is pivotal that you contact us or your accountant before selling.
New Build Dwellings As an incentive to generate more new build dwellings, the Government has determined that new builds will only be subject to a 5 year bright-line period rather than 10 years. However, there is no definition of what a ‘new build’ is yet.
A new build could cover the following situations: • when you purchase off the plan (i.e land and building package) from a developer. • when you buy land then build and a Code of Compliance issue arises within a year of settlement. • when 1 dwelling is converted into multiple dwellings. • when a commercial building is converted into residential units.
The above examples are purely speculative, and we await confirmation of the ‘new build’ definition in due course.
How We Can Help You? Our team at Collins and May Law are fully equipped in assisting you when it comes to buying and selling property and the potential impacts of the bright-line test. If you are thinking about buying or selling a property, get in touch with Collins and May Law today for further assistance.
