The requirement for capital gains tax to be paid on investment properties bought and sold within two years has passed into law.

The so-called 'Bright-Line' test for residential land was announced by the Government as part of May's Budget to try to dampen property speculation and better enforce already existing taxes on capital gains. It will require tax to be paid on any gains from residential property bought after October 1 and sold within two years. The exceptions to the rule are the owner's main home, an inherited property or the transfer of property after a relationship break up.

Revenue Minister Todd McClay said it was an important tool to ensure property speculators paid their fair share of tax. Where properties are sold on after that two year period, the pre-existing law will continue to apply. That means if a property was bought for the intention of making a profit, income tax must be paid on the gain when it is sold.

Mr McClay said along with new requirements for buyers and sellers of property to provide an IRD number it would help Inland Revenue better identify investors in residential property and ensure they paid tax when required.

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"IRD will be watching transactions as part of this requirement to provide IRD numbers at the time of sale. This will enable them to enforce income tax rules on those who might try to avoid their obligations outside the two year period."

A withholding tax collection mechanism for the bright-line test to apply to offshore sellers will be introduced as part of a wider tax bill soon.

Act leader David Seymour supported the change with his vote because he was required to as part of Act's confidence and supply agreement with National. However, he described it as a "public policy abomination."

Labour recently dropped its policy to introduce a broader capital gains tax, which was to apply to properties other than family homes.