Last week Revenue Minister Stuart Nash confirmed that the election "promise" to extend the Bright-Line Test from 2 years ownership to 5 years will be enacted, effective for properties acquired after the date of Royal Assent (likely March 2018).

While this has been sold as a mechanism to "dampen property speculation" and to "bring fairness back into the tax system", the reality is that this change is a further extension of the previous over-reach of a pseudo capital gains tax beyond the original intent of reinforcing the original "intent" test. This not only captures speculators, but also seeks to tax ordinary New Zealanders who are simply trying to get ahead as landlords or are fortunate enough to have holiday homes, but who may be selling residential property for a myriad of non-speculating reasons within 5 years. The Government reached a view in 2015 during a heated housing market, that the existing "intention test" was not a satisfactory scheme for dealing with land transactions. Under the intention test, gains from the sale of real property were taxable only where they were purchased with an intention of resale (ignoring those who were in the business or had schemes around developments etc). Although speculators were already technically captured by the existing rules, given the arguably subjective nature of this intention test, the IRD found the old rules difficult to enforce.

Accordingly, the new Bright-Line Test was introduced to apply to residential land which was acquired from October 1, 2015 to the extent that income tax is paid on any gains arising from the disposal of residential property within two years of acquisition, irrespective of intention. Thus, rather than solely targeting people who are speculating, the Bright-Line Test potentially applies to all residential property owners, irrespective of location, nationality and intentions.

Therefore, the Bright-Line test can encapsulate situations even where there was no intention of resale, or where the disposal occurred due to circumstances outside the taxpayer's control such as illness, lifestyle changes, financial pressures, bad experiences as a landlord, lack of use of property, changing where you live or holiday home in the wrong place, and the likes. The two-year timeframe runs from the date of acquisition to the date of disposal.


"Residential land" includes land with a dwelling on it or capable to have a dwelling on it, but expressly excludes business premises or farmland. However, the Bright-Line Test is subject to four exclusions, the most common one being the main home exclusion for residential land that is occupied mainly as a residence, and is the main home of the owner, or the beneficiary if the owner is a trust. Where a person has more than one residence, the residence with the greatest connection to the person will be classified as the main home and therefore excluded from the Bright-Line Test. Any other residential land gains will likely be subject to tax if within the timeframes.

As noted above, a change from 2 to 5 years will exasperate the concern that ordinary New Zealanders who are not property speculators, but simply may hold, say, a rental or a holiday home for less than 5 years are being taxed as if they are speculators. Further, one can see many more changes of circumstances like those listed over 5 years, compared to 2 years.

The reality is that there is no magic number; not 2, nor 5, but for carte blanche rules like the Bright-Line Test effectively deeming an intention upon you for 2 or 5 years, respectively, these propositions may have quite a different feel. If I buy a holiday home, I am not doing it for the short term and if circumstances change (death, relationship, location) within 2 years, that is unlikely and possibly unlucky but potentially can be rationalised as for the greater good. The chances of these unforeseen circumstances over 5 years are simply much greater and thus many more non-speculators will inevitably be caught.

• Scott Mason is the Managing Partner of Tax Advisory at Crowe Horwath.