Rachael Beatty: Bright-line test extended from two to five years

New legislation extends the bright-line test on residential property from two to five years. Photo / 123RF

On March 29 the Government passed The Taxation (Annual Rates for 2017-2018, Employment and Investment Income, and Remedial Matters) Act.

This new legislation extends the bright-line test (applicable to residential property) from two to five years.

The bright-line test which was originally introduced on October 1, 2015, effectively provides that income tax is to be paid on gains made when residential property is disposed of within a two year period (subject to certain exceptions).

This time period has now been extended to five years.

The operation of the bright-line test itself is exactly the same as it has been since it was introduced in 2015, the only change under the new legislation is that the test will now cover a longer five year period instead of two.

All of the existing exemptions and mechanisms around the dates of acquisition and disposal will remain the same.

What are the key things that you need to know?

• Gains from the disposal of residential property acquired and disposed of within a five year period from March 29, 2018 will be taxable, subject to certain exceptions.

• The five year bright-line period will generally start from the date that the title to a property is registered into a purchasers name, and ends on the date that a person enters into a contract to sell the property.

• The bright-line test only applies to residential property. Residential property includes land that has a dwelling on it, land where the owner has an arrangement to build a dwelling on it, and bare land that could have a dwelling erected on it under the relevant district plan. Residential property does not include commercial property or farmland.

• The bright-line test does not apply to a person's main home, or to property acquired through an inheritance.

Application of bright-line timeframes – how will these affect you?

In regards to applicable timeframes:

• Any contracts entered into prior to October 1, 2015 – the bright-line test will not apply;

• For contracts entered into on or after October 1, 2015 but before March 29, 2018 – the two year bright-line test will apply; and

• For contracts entered into on or after March 29, 2018 – the five year bright-line test will apply.

If you are considering selling residential property and you are unsure of whether the bright-line test will affect you, you should consult with your lawyer and accountant and work through the bright-line provisions carefully.