Parliament has recently passed legislation requiring greater disclosure for New Zealand property transactions. Refer to our article “‘New Property Rules Took Effect on 1 October 2015: What Should Buyers and Sellers Be Aware of Now?” for more information about the new disclosure regime.
As well as requiring further disclosure for property transactions, Parliament is proposing additional property taxation rules under the Taxation (Bright-line Test for Residential Land) Bill, which is now waiting to be passed into legislation.
The Property Bright-line Test Explained
Under the Bright-line Test residential property (other than the family home) purchased and sold within two years will be taxed.
The Bright-line Test will apply to residential properties where an agreement for sale and purchase is entered into on or after 1 October 2015.
The Bright-line Test applies only to residential property including residential property bought off the plan and bare land that is intended to be developed for residential use.
Calculation of Taxable Gains Under the Bright-line Test
The Bright-line Test only applies to capital gains made on residential property which are not taxed under other land taxing provisions. Note that land developments not carried out by a business may be taxed under the Bright-line Test, rather than the subdivision provisions of the legislation.
Where a gain is taxable under the Bright-line Test, the taxable gain or the loss is calculated by deducting the original purchase price, acquisition costs, disposal costs and costs of capital improvements from the sale proceeds.
Property gains will be included as income in the income tax return and will be taxed at the ordinary marginal tax rates.
Treatment of Losses Under the Bright-line Test
Any loss on disposal under the Bright-Line Test is ring fenced so that it can only be used to offset gains made under the other land taxing provisions of the Tax Act.
Under the Bright-line Test losses are not recognised where the loss arose due to the sale of the property to an associated person.
Exemptions to the Bright-line Test
The primary exemption to the Bright-line Test is the main home exemption. The main home* exemption applies where the land has a dwelling on it, the dwelling is occupied mainly as a residence by the owner for most of the time the person owns the land, and the dwelling is the main home of the owner.
The main home exemption can also apply to land owned by a trust, provided the dwelling is occupied mainly as a residence by a beneficiary of the trust for most of the time the trust owns the land, and the dwelling is the main home* of the beneficiary. This exemption does not apply where the principal settlor has a main home that is not owned by the trust.
Other exemptions are farm land (provided the land is used in a farming or agricultural business), relationship property transfers and disposals of inherited land.
*The main home exemptions mentioned above do not apply where the main home exemption has been used more than twice in a 2 year period.
Jim Martin is Head of Tax at UHY Haines Norton. If you have any questions or would like to discuss any aspects of the property bright-line test, please contact Jim on (09) 839-0241 or email email@example.com.