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Housing prices are booming so much that New Zealand is becoming one of the most unaffordable places to live. There are simply not enough houses to go around. On 23 March 2021 the Government announced some changes to New Zealand’s housing policy in order to try to fix this problem.

These changes include:

a) Extending the bright line test to ten years;
b) Granting over $3 Billion towards increasing housing supply;
c) Changes to first home grant caps; and
d) Changes to interest deductibility.

What Is The Bright Line Test?

The bright line test is used to establish whether a vendor needs to pay tax on the profits they have gained from the sale of a residential property. This was first implemented in October 2015 and provided that any property bought between 1 October 2015 through to 28 March 2018 and sold within 2 years was subject to the bright line test, meaning the profits were taxable. From the 29th of March 2018 the bright line test was changed from 2 years to 5 years in 2018 so profits on any properties bought on or after 29 March 2018 and sold within 5 years were taxable.

Once the legislation announced by the Government last week is enacted, the bright line test period will increase from 5 years to 10 years and applies from 27 March 2021. This means any Agreement for Sale and Purchase entered into after 28 March 2021 will be subject to the new bright line test period and so, if the property is then sold within 10 years of purchase then any profits from the sale are taxable.

If you have entered into a Sale and Purchase Agreement prior to 27 March 2021 but the settlement date is after 27 March 2021, then the 5 year rule will apply and you will only be taxed if you sell within the next 5 years.

Currently if the property is used for most of a person’s ownership as their main home, then the bright line test does not apply and the profits are not taxable. After 27 March 2021, if you use the property for the whole time you own it as your main home and sell within 10 years then the profits will not be taxable. However, if you change the use of your main home to a rental property for more than 12 months during the time you have owned it then you will have to pay tax on the profits on a portioned basis for the time it was not used as your main home.

For example, if Sarah purchases a new property to live in as her main family home on 30 March 2021 and she lives in it for two years but then she decides to move to Australia for two years. She rents the property while she is living in Australia. If she sold after those two years, she will need to pay tax on the profits for those two years in which the property used as a rental (i.e. As the house was used as a rental for 2 out of the 4 years Sarah owned the property, half of the profits are taxable).

The other scenarios where the bright line test does not apply include where you acquire property through inheritance or if you are the executor or administrator of a deceased estate.

The 5 year bright line test will still apply to new builds as the Government wants to encourage more houses to be built. The definition of “new builds” is to be confirmed by new legislation but the intention is that properties that are acquired within a year of a code compliance certificate issuing will be subject to the 5 year rule.