Bright-line test for New Zealand residential property sales

© Baucher Consulting Limited August 2015 All rights reserved.
Bright-line test for sales of
residential property
Terry Baucher, Baucher Consulting Ltd

Summary of Suggested Changes (1)
1. Bright-line test to apply to properties for which an
agreement for sale and purchase is entered into
from 1 October 2015
2. Disposals within two years of acquisition will be
automatically taxable
3. Exemptions for “main home” and disposals
because of death or under relationship property
agreement

Summary of Suggested Changes (2)
4. Deductions allowed according to ordinary rules
5. Losses arising ONLY as a result of the bright-line test
would be ring-fenced and no loss allowable if it
arises from a transfer to an associated person
6. Specific anti-avoidance rule proposed to counter
uses of “land-rich” companies and trusts

Date of acquisition and disposal (1)
1. Date of acquisition proposed to be the date title is
registered
2. This provides a definite date which can easily be
cross-checked by vendors and IRD
3. A definite date would also assist with
implementation of a withholding tax

4. Date of disposal should be the date a person
enters into a contract to sell the property
5. Using different relevant date for acquisition and
disposal should counter artificial deferrals of sales:
6. In this example deferred registration would take
property out of bright-line test

7. Gifts of land would be determined according to
ordinary rules i.e. when the gift is effective
8. For subdivisions the date of acquisition is the
original date of acquisition for the undivided land
9. Test also applicable where a person disposes of
residential property before taking legal ownership
and disposal was within two years of entering into
sale & purchase agreement

Main home exception (1)
1. This applies when
 the land has a dwelling on it;
 The dwelling is occupied mainly as a residence
by the owner; and
 The dwelling is the main home of the occupier
2. Where the property is owned by a trust the
exception applies if the dwelling is occupied
mainly as a residency by a beneficiary and is the
main home of a beneficiary

Main home exception (2)
3. Property owned by a trust not eligible if a settlor
 separately owns a main home; or
 is a beneficiary of another trust which owns his or
her main home
4. Current residential exclusion does NOT apply to
anyone with a regular pattern of acquiring and
disposing of dwellinghouses.
5. IRD considers “habitual renovator” should be
captured by existing intention test

Exceptions for inherited property
and relationship property (1)
1. New rules will not apply to the transfer of property
from a deceased estate to beneficiary who
subsequently sells the property

Exceptions for inherited property
and relationship property (2)
2. Transfers under a relationship property agreement
qualify for roll-over relief. However, the bright-line
test applies to any subsequent disposal by the
transferee:

Deductions (1)
1. Generally a deduction will be given for the cost of
the property including legal and other professional
fees and any capital improvements
2. Holding costs proposed to be deductible only to
the extent they have a nexus with income
3. A person who purchased a bach and sold it within
two years would NOT be allowed a deduction for
holding costs

Deductions (2)
May 2016: Denise buys a beach house for $500k solely for private use
May 2016 to 31 March 2017: Denise pays interest of $30k and rates of $5k
July 2016: Denise gets a new roof put on the building at a cost of $80k
2 April 2017: Denise sells the beach house for $800k
Deductions in 2016–17 year = $0 – The interest and rates are subject to the
private limitation
Deductions in 2017–18 year = $580k (Cost base of property = house and roof)
Income in 2017–18 year = $800k

Losses
1. Losses arising from the bright-line test are to be
ring-fenced so only able to be offset against
taxable gains on other land sales
2. Ring-fencing would NOT apply if sale is taxable
under any of the other land sale rules
3. A loss arising from a transfer to an associated
person will not be recognised

Land-rich companies and trusts
1. IRD proposes a specific anti-avoidance rule in
relation to land-rich companies and trusts used to
circumvent the bright-line test.

Bright-line test for New Zealand residential property sales

Recommended

Recommended

More Related Content

Similar to Bright-line test for New Zealand residential property sales

Similar to Bright-line test for New Zealand residential property sales (20)

Recently uploaded

Recently uploaded (20)

Bright-line test for New Zealand residential property sales