Exemptions To Five-Year Bright-Line Test
In part two of Carole Pedder’s series on the five-year bright-line test, she examines exemptions and how they apply.
31 May 2018
Following on from last month’s article, this month I will focus on some of the exemptions applicable under the bright-line test.
Definition Of Residential Land And Exemptions
For the purposes of the bright-line test, it is important to understand how residential land is defined.
Residential land is land that:
- Has a dwelling on it; or
- The seller of the land is a party to an arrangement that relates to erecting a dwelling on it; or
- Is bare land that may be used for erecting a dwelling under the rules in the relevant district plan.
- It does not include land (even if it satisfies one of the first three requirements), if it is used predominately for business premises.
- It does not include farmland.
This definition is important to understand as the bright-line test only applies to land that is residential land at the time of disposal. The characteristics of land can change over time. For example, a taxpayer may have purchased what they initially considered to be farmland. However, the land is not farmland unless it is being worked as a farming or agricultural business, or is suitable to be worked as such. Inland Revenue has signaled that a lifestyle block that is being used to graze a few sheep would not be sufficient to satisfy the land being classified as farmland. Equally, a 50-hectare block covered in gorse would also not satisfactorily be classified as farmland. The characteristics of land can also alter due to changes made by councils in their district plans.
‘Now that the bright-line period has been extended from two to five years, it is likely that more taxpayers are going to be caught as the characteristics of the land that they are holding changes'
It is just as important to understand how the exemption for business premises applies. The exemption applies not just to the owner using the buildings on the land in the course of their business, but also if they are leased to a third party to be used as business premises in the course of their business.
For the exemption to apply, the building on the land must be utilised as business premises. The Inland Revenue has given the example of a taxpayer purchasing an empty factory which they intend to develop into an apartment building. Ignoring any other taxing provisions that may apply to this taxpayer, if sold within the five-year period, even without any development undertaken, the bright-line rules will still apply. This is because the taxpayer had a plan to build the apartment building which satisfied the residential land definition and the factory was vacant at the time of sale so the business premises exemption did not apply.
Main Home Exemption
For the main home exemption to apply the land must have been used predominantly as the main home of the owner. To be able to apply this exemption, the owner of the property must have used the property as their main home for more than 50% of the time they have owned the property. Care needs to be taken if the property has previously been a residential rental property that the owner has moved into, especially if it has been tenanted for more than 50% of the time owned. It is not enough for the property to be occupied by a family member, it must be occupied by the owner.
Nor can the main home exemption be used if the land has multiple dwellings, of which the owner is only utilising one. An example of this would be a block of flats, where the owner utilises one as their main home and rents out the others.
Example taken from: Tax Information Bulletin 281-115 Vol 25, No 1, February 2016 at 83. Also published at: http:/www.ird.govt.nz. technical-tax/ legislation/2015-111-ta-bright-line.html