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What is the “bright-line” test? An update - Mortlock McCormack Law | Property and Commercial Law | Christchurch, New Zealand
What is the “bright-line” test? An update - Mortlock McCormack Law | Property and Commercial Law | Christchurch, New Zealand
What is the “bright-line” test? An update - Mortlock McCormack Law | Property and Commercial Law | Christchurch, New Zealand
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What is the “bright-line” test? An update

June 2021

Sarah Manning

The bright-line test is a rule that taxes gains from the disposal of residential property in New Zealand.
As you may be aware the bright-line test was extended earlier this year.
While the main rules remain, there are a number of revisions you should be aware of. We have summarised the most important updates below:

What is residential property?
The bright-line rules apply to residential property.
‘Residential land’ is defined as:

  • Land with a house on it;
  • Land for which the owner has an arrangement to erect a dwelling on (i.e. a house and land package);
  • Land the owner may one day build a house on.

But not all land is captured by the bright-line test. The following are exceptions:

  • Your main home: the test won’t apply where the dwelling is the main home of the owner (with some exceptions). Note the home needs to have been your “main home” while you owned it. There are further rules around the definition of “main home” and these were strengthened (in favour of the IRD) in the recent bright-line revisions.
  • Farm land: this includes land capable of being used in farming/agricultural business.
  • Land predominantly used for business purposes.

What’s new?
This year the Taxation (Annual Rates 2020-21, Feasibility Expenditure, and Remedial Matters) Act 2021 (“the Act”) included a Supplementary Order Paper (“SOP”) which revised the bright-line test. Now, property bought and sold within ten years is captured by the bright-line test (as opposed to five years). However, the new ten year rule only applies to property acquired on or after 27 March 2021.

It is important to note that the date you acquired your residential property will determine the relevant test. The date of acquisition is usually the date of registration of your interest in the land. We have summarised the relevant dates below:

  • Your interest in the land was acquired prior to 1 October 2015: no bright-line test.
  • Your interest in the land was acquired between 1 October 2015 and 29 March 2018: bright-line applies where bought and sold within 2 years.
  • Your interest in the land was acquired between 29 March 2018 and 27 March 2021: bright-line applies where bought and sold within 5 years.
  • Your interest in the land was acquired after 27 March 2021: bright-line applies where bought and sold within 10 years (with the exception of new builds which will remain subject to the five year test, though the final rules around this are yet to be finalised).

How might this affect me?
It’s not just property purchases that are affected by the bright-line test. You should also turn your mind to the bright-line test if you are thinking about winding up a trust or restructuring your properties in some other way.

We are not accountants, so while we have a good understanding of the risks that a property owner may face due to the bright-line rules, we always advise our clients to take accounting advice at an early stage (which can help avoid nasty surprises!). We are happy to help you with all your buying and selling needs.

Contact Sarah Manning, Partner (DDI 03 343 8456 /sarahm@mmlaw.co.nz) or any of the staff at Mortlock McCormack Law if you have any questions relating to the bright-line rules, or you need help with buying or selling a property.