New Extension of the Bright Line Test
In October 2015 the Government introduced the ‘Bright Line Test.’ The purpose of this test was to tax people on any “capital gains” made from the sale of residential land when that sale occurred within two years of the party acquiring the land and when an exemption to the tax did not apply.
Recently, a rather significant amendment has been made to this test that may affect you if you acquire property after 29 March 2018. Below we discuss this change and note the keys points that you should be aware of.
The timeframe under the Bright Line Test has now been extended from 2 years to 5 years.
Application of the Bright Line Test Moving Forward
Application of the Bright Line Test is now as follows:
- If you acquired your property prior to 1 October 2015, the Bright Line Test will not apply (this position has remained unchanged);
- If you acquired your property from 1 October 2015 to 28 March 2018 (both days inclusive) the original 2 year timeframe under the Bright Line Test will continue to apply;
- Any property acquired from 29 March 2018 will now be subject to the 5 year timeframe under the Bright Line Test.
The date you acquired the property is typically the date that you entered into an Agreement for Sale and Purchase to purchase the property (although this position can vary).
Residential Land Withholding Tax
Residential land withholding tax criteria has now also changed for offshore RLWT persons to align with the change to the Bright Line Test. For property acquired from 29 March 2018 onwards, tax will be withheld by the solicitor/conveyancer for an offshore RLWT person and forwarded to the IRD on the sale of residential property sold within 5 years of its acquisition (if an exemption does not apply).
Does the bright-line test apply to all residential property?
All residential property is subject to the Bright Line Test however, the original exemptions to the Bright Line Test continue to apply. Primarily if the land was used as your main home, was transferred to you as part of an inheritance or was transferred to you as an executor or administrator of an estate. In all other situations, you will need to look to the test to determine whether you are obligated to pay tax.
If you have any concerns or questions regarding the Bright Line Test and RLWT, and how it applies to your situation, we have teams based in Riccarton, Hokitika and Rolleston who would be happy to assist. Please feel free to contact us to discuss further..