Bright-line test targets gains on property sales

Revenue Minister Todd McClay says measures proposed in a tax bill introduced today will improve compliance with the current residential land sale rules and help to ensure that people pay their fair share of tax on gains from property sales.

The main feature of the Taxation (Bright-line Test for Residential Land) Bill is a proposed new “bright-line” test, which will require income tax to be paid on any gains from residential property purchased and sold within two years, with some exceptions.  The exceptions include the sale of an owner’s main home, inherited property, or the transfer of property in a relationship settlement.

“The proposed new test will only apply to the sale of “residential land” – it does not apply to land predominantly used as business premises or farmland.

“The bright-line test makes it clear that all property buyers, including overseas buyers, who buy and sell a residential property within two years, will be taxed on their gains,” he says.

The bill defines certain terms in the Income Tax Act 2007 to make it easier for taxpayers to understand their income tax responsibilities when selling a property or residential land that is subject to the bright-line test.  For example, the bill defines what “residential land” is and what a person’s “main home” is.

It also defines the start and end of the two-year bright-line period. The period generally starts when a person obtains registered title for the property, and ends when the person enters into an agreement to sell the property. An additional rule applies for sales “off the plan”. 

The bill limits the use of losses arising under the bright-line test.  The bill also includes an anti-avoidance rule to prevent companies or trusts being used to circumvent the test.

“The proposed bright-line test follows the Government’s consideration of feedback received during public consultation undertaken in June this year. 

“It will supplement the current “intention” test in the Income Tax Act 2007, which can be difficult to enforce.

“The changes proposed in this bill, together with those included in the recently introduced Taxation (Land Information and Offshore Persons Information) Bill, will help Inland Revenue to more accurately identify investors in residential property – here and overseas – and ensure they pay their fair share of tax”, says Mr McClay.

A summary of the Bright-line Test and Q&As are attached.