With recent changes to the Bright-line Test, the once fairly simple test for determining whether certain property transactions were subject to taxation on sale, has evolved into a far more complicated test,

with multiple bright-line periods and multiple changes to how the test can apply.

In its basic form, the Bright-Line Test applies when a residential property is sold within a specified period of time (unless an exemption applies) to tax an affected person on the gain they have made on the sale of the

property.

However, while simple in theory, in application it has proven to be far more difficult to determine and has caught out many unsuspecting property owners

As noted, there are multiple bright-line periods that can apply depending on when an interest in

property is acquired, these are:

 2 years if acquired from 1 Oct 2015 to 28 March 2018;

 5 years if acquired from 29 March 2018 to 26 March 2021;

 For acquisitions on or after 27 March 2021,

 5 years if a property meets the requirement of a “new build”

 10 years for all other properties.

Therefore, depending on when your residential property was purchased, it could currently fall under the 5 or 10 year bright-line period.

In addition to this framework, there are also exclusions to the bright-line test. The most common being the main home exclusion.

If the property has been your main home, and it has not been rented for any period or left empty while you resided elsewhere, then this exclusion would apply. You do not have to pay tax on the profit from

the sale of the home.

In contrast, if you have ever rented the property or it was not your main home, then the Bright-line Test might apply. Similarly, if you did not live on the property for the entire period of ownership, perhaps because it was bare land prior to building, then you may also be liable. In this respect the Bright-line Test can be a fairly blunt tool, punishing outcomes it wasn’t implemented for, such as legitimate changes in a person’s situation.

A further complication is that there are also different rules in relation to the main home exclusion depending on which Bright-line period applies.

The Bright-line Test is a particular area of focus of the IRD, to the point that taxpayers have started to receive an alert in their myIRD account to notify them that IRD records show they have recently sold

or transferred a residential property that could have been subject to the Bright-line Test.

The pre-populated information includes purchase and sale details of the property, include the value on each of these dates. This information should be checked to ensure it is correct.

Parents looking at helping their children into a property also need to consider the Bright-line Test to ensure they are not inadvertently caught.

Don’t be caught out with the sale of your property. Receive the right advice regarding the potential Bright-line impact for your circumstances by Contacting Findex today.

Findex NZ Limited trading as Findex.

The views and opinions expressed in this article are those of the author/s and do not necessarily reflect the thought or position of Findex NZ Limited.

See our disclosure information on our website https://www.findex.co.nz/disclaimers/disclaimer-and-disclosure July2022