Beware the bright line

01 July 2018

The Inland Revenue Department has warned owners who try to avoid the new five-year residential property sales bright-line tax test that they do so at their peril.

The previous National-led government’s bright-line test applying to profits on rental property sold within two years of purchase was extended to five years on March 29 this year. The move is part of a suite of the coalition government’s changes designed to make housing more affordable and discourage speculation.

But a joint IRD-Treasury impact assessment on the extension revealed that voluntary taxpayer compliance with the two-year bright line rules, which came into effect in October 2015, appeared to be less than 50%.

An IRD spokesman said the department goes to significant lengths to help taxpayers meet their tax obligations “but New Zealanders can be confident we will take every action against those who deliberately cheat the tax system”.

If you entered into an agreement to purchase residential property on or after 29 March 2018 and sell it within five years, you’ll need to consider if it is taxable under the bright-line test. And if a property was purchased on or after 1 October 2015 through to 28 March 2018, the bright-line test will look at whether the property was sold within two years.

The test doesn’t apply if the property was:

  • your main home
  • transferred as part of an inheritance
  • transferred to you as an executor/ administrator of a deceased estate.
  • Transferred to your full ownership as part of a matrimonial settlement

Some unwitting property owners have come to IRD’s attention by purchasing a property with the intention of using it as their family home, but then moving away, buying another property and using the initial property as a rental.

Quinovic property managers and principals advise clients to discuss any property sales with their accountant, lawyer or tax adviser to ensure they are operating within the rules and paying any tax that may be due on a sale.

Revenue Minister Stuart Nash said the extension to five years would help dampen property speculation and make homes more affordable. The changes would ensure that residential property speculators paid income tax on their gains, "and make property speculation less attractive", he said.

In the lead-up to the election last year Labour said it would not propose any comprehensive capital gains tax in this term of government but might effectively seek a mandate for such a tax at the next election. It subsequently set up a Tax Working Group, headed by Sir Michael Cullen, which Mr Nash said would be able to factor the change into any consideration of a comprehensive capital gains tax. 

The IRD website has a net profit (loss) calculator which can be used as a guide to whether the brightline test applies to the sale of your property/ies.

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