RECENT CHANGES TO THE BRIGHT-LINE TEST

Posted by Jessica Belgrave on June 30 2022 in News

The government recently extended the bright-line test to 10 years for residential properties acquired on or after 27 March 2021. This means that any gains made on the sale of residential property during the bright-line period will be subject to tax unless an exemption applies. These changes relate to:

New builds:

If a property qualifies as “new build land”, the five-year bright-line test may apply. Generally, “new build land” means a dwelling that is configured as a self-contained residence or abode, if a code of compliance certificate has been issued on or after 27 March 2020 evidencing that the dwelling was added to the land or converted into a residence or abode. Subject to certain criteria being met, “new build land” may include:

• Land where there is an agreement to add a new build dwelling;
• Existing buildings that are converted into self-contained residences; and
• Existing buildings that are remediated for weather tightness or seismic issues.

Apportionment rule for main homes:

New “main home” rules will apply to properties acquired on or after 27 March 2021. The land will be apportioned between the areas that are used for the main home, and the areas that are not used for the main home, to ensure that only gains attributable to the non-main home use are taxed if the land is disposed of within the applicable bright-line period.

12-month buffer rule: 

In recognition that 12 months may not allow sufficient time to design, consent, and construct a dwelling, the 12-month “buffer” rule has been amended to allow owners additional time to construct their dwelling on bare land.  Provided such a period is reasonable in the circumstances, the owner will still qualify for the main-home exemption.  

Transactions involving change to the legal owner without changing the economic owner: 

A transfer of the legal ownership of a property where the “economic ownership” remains unchanged may not trigger the bright-line test in certain circumstances. Such circumstances can include:

• A change of trustees;
• Property transfers to or out of a family trust, provided certain criteria are met;
• A joint tenancy is converted to a tenancy in common (and vice versa);
• Property transfers by or to persons in their capacity, as look-through company owners or partners in a partnership.

In each case, the facts of the scenario will need to be worked through in detail to ensure the applicable criteria have been met. 

The bright-line test can impose significant tax consequences on the deemed sale or transfer of land. The above only addresses the recent changes to the bright-line test. To understand how the bright-line rules may apply, we recommend that professional advice be sought prior to entering into a transaction or restructuring your affairs.

Deanna Clark | Partner |  deanna.clark@shieffangland.co.nz
Jessica Belgrave | Senior Associate | jessica.belgrave@shieffangland.co.nz

This paper gives a general overview of the topics covered and is not intended to be relied upon as legal advice.