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Bright-Line Enforcement Initiatives

IRD have been contacting taxpayers they believe may have tax liabilities caught by the bright-line test, so investors need to know their tax position, writes Mark Withers.

By: Mark Withers

1 January 2021

Since the introduction of the bright-line tax rules it has been compulsory to provide an IRD number when transacting a land transaction in New Zealand. This information has ensured IRD can identify individual taxpayers who may be liable for income tax on residential property transactions where land is sold within the bright-line period simply by cross referencing IRD numbers with land transfer records.

Recently IRD have begun contacting taxpayers they believe may have tax liabilities associated with land transactions caught by bright-line and have been inviting them to complete the IR833 property sale information disclosure document. This suggests an active enforcement approach from IRD and means property investors must be across the bright-line rules and the exemptions that can apply to them. So, in this article we recap some of the key bright-line rules.

Why Was Bright-Line Introduced?

As a political response to rising house prices that was blamed on speculation in the housing market. The original intention provisions in section CB6 were strengthened by the National Government by introducing income tax on and sale of residential property not covered by an exemption that occurred within two years of acquisition.

The subsequent Labour Government then increased the two-year threshold to five years effective from 29 March 2018. Interestingly, having ruled out a comprehensive capital gains tax, the Labour Government now seems to be looking to further extend the bright-line rules out as far as ten years despite the rules having had no success in reducing the rise of residential house prices in New Zealand.

What Are Key Features Of The Rules?

Firstly, the rules apply to all residential land. Defined as land that has a dwelling on it; or land for which an owner has an arrangement to erect a dwelling; or bare land that may be used for erecting a dwelling under the rules of the relevant district plan.

Residential land does not include farmland or business premises so commercial property is generally not impacted by bright-line. The bright-line test does not apply to inherited land or land transferred pursuant to a relationship property agreement.

For the purposes of the brightline test a person does not generally “acquire” land until the person is the registered owner of the land but the person disposes of land when they enter into a contract for the sale of land, accordingly, care is needed if you are counting days as the start date for the bright-line period is measured from a different marker than the finish date.

A main home exclusion does provide an exemption to bright-line for a taxpayer’s main home. To gain the exemption though, a taxpayer must have lived in the home predominantly and for most of the time it has been owned as the taxpayers dwelling. If the property is held by a trust the exclusion only applies for the main home of the principal settlor of a trust. This has added complications for families using trusts to hold homes for beneficiaries. The main home exclusion can also only be applied two times in two years and won’t apply when the taxpayer has a regular pattern of buying and selling homes.

The bright-line rules contain special treatment for subdivided land, land where a lessee acquires and disposes of a freehold title and to land acquired “subject to title”. One of the key issues with the impact of bright-line is the restructuring of land holdings, movements of land between associated parties and entities is not exempt from bright-line so a restructure can trigger or re set it. Great care is therefore needed when contemplating restructures and trust resettlements.

Bright-line can also apply to residential land held overseas by New Zealand resident taxpayers. It’s fair to say there are many traps with the bright-line rules and many situations are fact specific in terms of whether it will apply to a land sale. There is likely to be a large increase in taxpayers caught by bright-line as a result of the timeframe being extended from two to five years and now possibly further.

A further extension of bright-line would also decrease supply of property to market as owners hold onto land, they might otherwise sell to avoid tax, further driving up price. It is accordingly advisable to seek the input of a tax expert when contemplating residential land transactions in New Zealand.

The IRD are clearly monitoring all land sales and those falling short of the bright-line timeframes can expect to be picked up.

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