Are you thinking of selling after a two year period? Here is a timely reminder about the Bright-Line rules!

19 December 2017

Are you thinking of selling after a two year period?  Here is a timely reminder about the Bright-Line rules!

Here are some important points around the Bright-Line Test that you need to be aware of:

Currently 2 year period.  So, in general, if you buy a rental, sell within 2 years, any gains will be taxable.

Measuring the Bright-line Time Period:

• Effective from 1 October 2015.  So, if Sale and Purchase Agreement dated before that, then Bright-Line doesn't apply.
• Date of Acquisition = Normally Settlement.
• Date of Disposal = Sale & Purchase Agreement date.

Must be residential land: There is some criteria around this:

• Includes overseas residential land!  But should also get foreign tax credit if gain taxed overseas already.
• Includes B&B's and AirBNB properties.

Off The Plan Sales:

• Purchase = date of Sale & Purchase Ageement.
• Sale =  date of Sale & Purchase Agreement.

Subdivided Land:

• Date of Acquisition = registration of undivided land, i.e. when the whole property is purchased.
• Date of Disposal = Sale & Purchase Agreement for sale of section.
• NOTE:  Likely to be taxable under other tax provisions.

Leasehold to Freehold:

• Date of Acquisition = date lease granted Gift.
• Date of Disposal = date of registration

Compulsory Acquisition:

• Date of Disposal = date of compulsory acquisition

Mortgagee Sale:

• Date of Disposal = date of disposal by mortgagee.

Nominations: 

• Originally IRD viewed nominations as a disposal, and therefore any gains could be taxed under the Bright-Line rules.
• In early 2017, IRD retracted and have confirmed no sale or disposal on a nomination - which is good news.

Main Home Exclusion:

• Can be Trust
• Must be predominately main home, so more than 50% of time used as main home.  If vacant and renovated for more time than used as a personal house, then not main home.
• Main Home Exclusion can only be used twice in 2 year period.
• Doesn't apply if there is a pattern of buying and selling personal home.
• Holiday ok if short term.  Longer time, depends on exact circumstances and as long as you don't set up another home, it should be ok.
• Subdivide main house.  Generally section sale would also have main home exclusion but would suggest getting full advice on this to double check.

Main home looking at buying and selling for a profit:

• If intention is to renovate and sell for profit, then taxable under other income tax sections.
• Main home exclusion would not apply.
• So be very careful with what your intention is and how this is documented!

Main Home intended to renovate and sell:

• Gain is taxable.

Main Home, intended to live in and renovate.  But then later decide to sell:

• Gain not taxable and exclusion for main home should apply (as long as no pattern of buying and selling, and still meet home exclusion provisions).

Relationship Property Transfers:

• Generally excluded and transfers deemed to be at cost.

Inherited Property:

• Generally excluded.

Change of Trustee:

• If only a change of Trustee, then stays with original registration date.

Residential Land Withholding Tax (RLWT):

• Applies from 1 July 2016.
• Only for Offshore RLWT person who disposes of land subject to Bright-line rule.
• Only relates to New Zealand land.
• Obligation on conveyancer at settlement and to account to IRD.
• If taxed under other tax provisions, but within 2 years, there will still be RLWT if vendor is an "Offshore RLWT" person.
• There are three RLWT methods.

I hope this summary of the main points is helpful.

Kind regards
Ross Barnett