For those less fluent in nautical or ecological terminology, bycatch most commonly refers to the unintentional and unnecessary death and destruction caused when fishing nets and hooks catch things other than their intended target. It’s a major problem that kills large numbers of dolphins, turtles, seabirds and other marine species. Most of the time you can go about life not thinking about it. But what if you’re the dolphin?
You probably know by now about the March rental property tax announcements. If not you can read my initial comments in March, and my analysis of the discussion document released for consultation in June, in previous posts. While interest deductibility naturally received the most attention, changes to the Bright Line test were included too – not just the (totally unnecessary) increase to 10 years, but a more insidious change too that is likely to “bycatch” a lot of private home owners who think Bright Line is only for property investors.
Applying only to residential property (including property located overseas), the Bright Line test is effectively a tax on capital gain. Initially brought in by the National government in 2015 to assist the IRD in catching property speculators buying and selling for profit (an activity that was always taxable, but hard to prove), it was subsequently extended and altered by the Labour government in 2018 and 2021 to create a pseudo Capital Gains Tax applying only to residential property.
When a property sale is caught by these taxing provisions, the gains are added to your total income and taxed at your marginal tax rate. Because of the large amounts of money involved, most of the gain will usually be taxed at the 33% or newly introduced 39% rate.
Pre 01/10/2015 are outside the Bright Line regime, unless subsequently restructured to a new entity.
01/10/2015 – 28/03/2018 have a 2-year Bright Line.
29/03/2018 – 26/03/2021 have a 5-year Bright Line.
27/03/2021 onward have a 10-year Bright Line, unless a “New Build” (firm definition still pending, but some details here) in which case it’s still 5-years.
Note that “Acquired” isn’t the same as “Owned” – in most cases your acquisition date is the date you sign the contract (even if still conditional), which is usually a few weeks before settlement and can be much longer.
Under the “old rules” (for properties acquired pre-27 March 2021) to qualify for the Main Home exemption you had to live in the property for more than 50% of the time you owned it. When sold within the Bright Line period it was either fully exempt, or fully taxed, based on this criterion.
Under the “new rules” the Main Home exemption is apportioned – any period of more than 12 months not used as the main home catches the property, and a portion of gains are taxed if sold within the Bright Line period.
There are a number of situations in which your private property could be caught and any gains taxed. These are briefly set out below:
When parents buy a home “for the kids” this will be taxed when it is sold to them within the relevant time period. Even if sold for the same amount there is likely to be tax to pay, as land transactions between related parties are deemed to occur at market value.
This one is actually more complex, as it was technically always taxable even before Bright Line was implemented, under the Intention Test (buying land with intention to resell it, gains are taxable) but this test was difficult to prove and thus not often enforced. The data collection systems and resources allocated to enforcement of the Bright Line test will see these arrangements caught much more often.
The family bach is not anyone’s main home. If sold within the applicable time period, gains are taxed.
Some people have two homes – they need to choose (with evidence in case it’s challenged) which is their “main home” and the other one doesn’t get the exemption. That wasn’t such a big deal under a 2 or 5 year bright line, but in 10 years it’s much more likely to be an issue – the average home owner in New Zealand sells after 7 or 8 years.
The above example could be grossly unfair for someone who owns a home in Auckland but only lives there weekends, while renting in Wellington where they work. The Auckland home is probably not the ‘main home’ if only used 8 days a month, so no exemption even though only one property is owned!
Under both the old and new Bright Line law, people buying off plans to occupy can be in trouble. The bright line date starts when you sign the contract, not on settlement.
Under “old rules”, if a build takes for example 18 months, that counts as “not main home” time, so if it is sold before it is lived in for at least 18 months, tax is paid on the whole gain, even though it’s never been a rental.
Under “new rules” it’s potentially worse. Same build, 18 months – if sold at any time within the bright line period there will be proportional tax on gains. For example if sold after living in it for 3 years you’d be taxed on 33% (1.5 years / 4.5 years) of any capital gain – even though it’s never been a rental.
People who move homes temporarily (perhaps for a lengthy holiday, or remote job posting) can come under fire in the new rules – whether the property is rented or not. If they’re gone for more than 12 months, they must pay tax on a portion of their gains if sold within 10 years of purchase. Again: the majority of people in New Zealand sell their home within 7-8 years. This is likely to affect a lot of people.
Some of the above situations can be mitigated with proactive tax advice – but many private home owners won’t look to get tax advice before selling their own homes. Due to large historical gains in value of property the tax bills resulting from a taxable sale can be substantial – often enough to consider delaying the sale a few years if advice is sought.
Lastly, it’s important to note that Bright Line is not the only way that you can be taxed on the sale of your property. There are multiple others such as the intention test mentioned above, special sections relating to subdivision and development, tax rules that relate specifically to builders and those associated with them, and more! If you have any doubts at all I recommend getting in touch with your accountant, or me.
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