Bright-line test to be extended, 15 February 2018

On 15 February 2018, the Minister of Revenue, the Hon Stuart Nash, confirmed that the bright-line test on residential property sales will be extended from two years to five years.

Supplementary Order Paper No 13 is to be introduced to the Taxation (Annual Rates for 2017–18, Employment and Investment Income, and Remedial Matters) Bill currently making its way through Parliament.

The objective in extending the current bright-line test from two years to five years is to ensure that speculators pay tax on the gains from property speculation and also to improve housing affordability for owner-occupiers by reducing demand from speculators.

The proposed five-year bright-line test has the same structure and design features as the two-year bright-line test. These design features includes the following:

• The five-year period for the bright-line test runs from the date of settlement to the date a person enters into an agreement to sell the property. An additional rule applies for sales "off the plan".

• The extended bright-line test only applies to properties for which an agreement to purchase the property was entered into from the date of enactment of the Bill.

• The bright-line test only applies to residential land. Residential land includes empty land planned to be used for residential purposes but excludes business premises and farmland.

• The bright-line test does not apply to a person's main home. A person can only have one main home. The main home exception is available to properties held in trust.

• There are exceptions for relationship property and inherited property.

• Taxpayers are allowed deductions for property subject to the bright-line test according to ordinary tax rules.

• Losses arising from the bright-line test are ring-fenced so they may only be used to offset taxable gains from other land sales.

Extending the bright-line test from two years to five years has a consequential effect on the current residential land withholding tax rules. These rules generally require a conveyancer to withhold tax from the proceeds of the sale of residential land by an offshore person when the disposal would be subject to the bright-line test. Consequential amendments have been made to these rules to align them with the extended bright-line test.

The Minister noted that the extension to the bright-line test will apply to residential investment properties purchased from the date on which the Bill receives the Royal assent, which is expected in March. The Minister said that the passage of the Bill will also enable the Tax Working Group to factor the change into any consideration of a capital gain tax.