In 2015 the National Government brought in a two-year bright-line land sales test. This bright-line test required income tax to be paid on any gains made from the disposal of residential land which was acquired and disposed of within two years of purchase. The purpose of the introduction of this legislation was to strengthen the existing land taxing provisions by introducing an additional test alongside the current “intention provisions” which was easier to measure and apply to tax payers’ circumstances.

The two-year period starts from the date of acquisition, being in most instances registration of title, to the date of disposal, being generally the date a contract for disposal of land is signed. Note that the contract did not have to be an unconditional contract. Special rules apply to the sale of land “off the plans”.

There are exemptions in place for taxpayers in certain circumstances including an exemption which is applicable to the disposal of a taxpayer’s main home. This exemption can also extend to trusts in some, but not all circumstances. There are also anti-avoidance rules, which are designed to prevent the use of companies and trusts to avoid the bright-line test.

The current Government has campaigned heavily on its promise to make home ownership more affordable for all New Zealanders. Contained within its strategy was the promise to change the bright-line test applicable to the sale of residential land from two years to five years.

‘There are exemptions in certain circumstances applicable to the disposal of a taxpayer’s main home’

On March 29th this promise took its final step when the bill received Royal Assent and now becomes law. Property purchases from this date onwards will be caught under the new five-year bright-line test.

Although the changes made to the existing legislation were relatively simple, just replacing the word “two” with the word “five”. There is no doubt that the Government will considerably increase its tax-take by extending the bright-line test to five years.

Unfortunately a lot can change for a person in a five-year period perhaps with family, employment or health. This extension is likely to catch out genuine property owners, investors or owner occupiers who, due to circumstances out of their control, are forced to sell property prematurely.

It is going to be important for homeowners and investors alike to gain a strong understanding of what the new five-year bright-line rules entail to make sure that they do not inadvertently fall foul of the legislation.

An example of this would be for property investors who have purchased property after October 2015 when the two-year test came into effect and plan to continue to expand their portfolio. Particular care will need to be taken to record and track the true acquisition dates for bright-line test purposes. It is likely that properties will be subject to different bright-line rules for a period of time.

In the next three issues I will be writing a series of articles designed to take a more in depth look at the impact the new five-year bright-line test will have for property owners.

In next month’s article we will be taking a closer look at the exemptions contained within the bright-line rules and how they apply to taxpayers with different structures, in particular family homes owned by trusts.

In the meantime if you have concerns on how the change will impact you, feel free to contact Withers Tsang and talk to one of our experts.

Carole and her team specialise in advising on property-related transactions, valuation and restructure services, and tax planning. Withers Tsang & Co Phone 09 376 8860, www.wt.co.nz