Changes to the Bright-Line Test
Changes to the Bright-Line Test have been proposed by the new Labour-led coalition government with discussion set down in Parliament in the next few weeks.
What is the Bright-Line Test?
The National-led government first brought in the test on 1 October 2015, under pressure to do something about the rising cost of residential homes and to reign in the activities of speculators.
In brief, the legislation requires that income tax is paid on any gains from the sale of residential property that is bought and sold within two years.
The main home of residential owner-occupiers is exempt.
Losses arising from the bright-line test are ring-fenced so that they may only be used to offset taxable gains from other land.
The sale of the property triggers the bright-line test even if the vendor never intended to acquire the property with the intention of resale.
It is important to note that the bright-line test extends to foreign property as well. If you own a property abroad and dispose of it within the time period, any capital gain will be taxed.
You can read more about the bright line test on another blog article here.
The new Labour-led coalition government proposes increasing the term of the bright-line test to five years. A supplementary order paper was added to a bill currently before Parliament. The government states that the goal is to increase housing affordability and to take speculators out of the market.
Although the bright-line test is not strictly a Capital Gains Tax, as it only applies if you sell within the prescribed period, we note that many overseas jurisdictions that have Capital Gains Taxes have not avoided rapid residential property price escalations. Low interest rates have been a big contributor, along with supply constraints.
We are concerned that the proposed change may have unintended consequences. Although the target of the changes are property speculators, this legislation will impact ‘mum and dad’ investors. Five years is a long time in anyone’s life and a lot can happen in that time. Even under the existing two year rule, there have been a number of unintended consequences. Relationship break-ups, death, loss of income and relocation are common examples. We also believe that the rule change may impact on the supply of residential rental property in the longer term. The rule not only covers residential rental property but also holiday homes.
There are many examples where the owner of the property is not a speculator and yet they are caught by this legislation.
If the legislation passes as expected, the new five year period will come into effect when it is granted Royal Assent by the Governor-General. That is likely to occur in March, so there is still a short period of time where the existing two year test will apply.
If you are buying residential property, we strongly suggest seeking advice to ensure that you do not inadvertently make a decision that you may later regret. There are other provisions in the Income Tax Act 2007 that may apply.
Generate Accounting specialises in this advice and we’d be only too happy to help.