The Bright-Line Test Extension Explained…
The “bright-line test” has legally been extended from two years to five years – a key highlight of the newly legislated Taxation Bill (Annual Rates for 2017-18, Employment and Investment Income and Remedial Matters). This development doesn’t come as a surprise, as cracking down on property speculation was a common theme throughout Labour’s pre-election campaign. Despite the preemptive information, the bright-line test’s extension is causing much discussion within the real estate and property investment industries, especially pertaining to its purpose and real-world effects, and the hazy grey areas surrounding any new law.
Recapping the bright-line test
Introduced in 2015, the bright-line test states that any financial gains made from the sale of a residential property within two years of its acquisition are taxable. This test helps determine whether residential dwellings are purchased on the sole basis of profit or for business, and acts as an “intention test” where taxpayers return any gain as income when selling a house.
The two-year time period begins when the land is transferred and registered to the person under the Land Transfer Act 1952. Generally, this period ends when the person enters an agreement to dispose of the land. Due to the subjective nature of the test, IRD has created a graph of start/end dates for non-standard sales, which you can read here.
What has changed?
The bright-line test will continue to operate as it did since its introduction in 2015, and the only thing that has changed is the extension from two years to five. This means that any residential properties purchased or acquired before 29 March 2018 will still be under the two-year bright-line test. After this point, if a residential dwelling is disposed or sold within five years, the sale of that dwelling will be taxed unless an exemption applies.
Are there exceptions to the rule?
The bill’s main exception that the rule doesn’t apply to a person’s “main home” still stands. A person’s “main home” is the predominantly used residential property for most of the time the person owned the land. If a person has more than one home, the home with which they have the greatest connection is their “main home.”
Why extend the bright-line test?
Property speculation in New Zealand is a well-discussed issue, especially because residential property value has been rapidly fluctuating ever since the end of 2016, causing housing prices to increase. The bright-line test is believed to help improve housing affordability, reduce speculative demand, stabilise the housing market, and bring back fairness to the tax system. This change ideally only impacts property speculators rather than long-term investors who are in it for longer than five years.
The not-so-bright-side of the bright-line test extension
Despite the government’s positive intention, there are some anticipated dark sides to the bright-line test’s extension.
Firstly, lowering the supply of houses for sale could increase demand, inadvertently pushing up house prices instead of lowering them. Additionally, officials from Inland Revenue and Treasury speculate that reducing the supply of rental housing could outweigh the reduced demand for rentals. Non-speculators will also be caught in the tide, such as Kiwis who may want to sell property for a variety of other reasons besides profit, such as illness, lifestyle changes, financial pressures, and many others.
The bright-line test remains subjective and still contains a lot of grey areas. From this point on, it will be necessary to stay tuned on how the government intends to deal with these grey areas and the potential loopholes and carve-outs in practice.
Need help? Contact Mickey Zhu & Team
For more information on the bright-line test and how it could affect you, contact Mickey Zhu & Team today. As the Top Sales Consultant agent for Harcourts Cooper & Co’s North Shore Central branch, Mickey and his team have successfully marketed and sold over 300 properties for happy clients on the North Shore, as well as over the bridge. Let us help you make the most of your investments and get in touch with Team MZ today.