The new bright-line test taxes profits from residential land sales within 2 years of purchase. It applies to land bought after October 1, 2015, without needing to examine purchase purpose/intent. Residential land includes properties with dwellings, land for future dwellings, or vacant land suitable for dwellings. The main home exclusion applies only twice in 2 years. For offshore sellers, there is a proposal to withhold part of sale proceeds and pay it to the IRD as a tax prepayment.

1. Taxation (Bright-line)
Test for Residential
Land
January 2016
Allister Doo
Hornabrook Macdonald Lawyers

2. Background
Section CB 6 of the Income Tax Act 2007 already
provides that:
“An amount that a person derives from disposing of land is
income of the person if they acquired the land—
(a) for 1 or more purposes that included the purpose of
disposing of it:
(b) with 1 or more intentions that included the intention of
disposing of it.”
However this purpose/intention test is seen as difficult to
enforce.

3. Background continued
• A ‘bright-line’ test has been introduced that avoids the
need to examine purpose/intention or the activities of the
land owner.
• The test will apply in addition to the existing tests for
taxing property gains.
• The test applies to certain land purchased after 1
October 2015 and sold within 2 years.

4. Bright-line test for residential land
The bright line test is contained in a new section CB 6A
of the Income Tax Act:
“(1) An amount that a person derives from disposing of
residential land is income of the person, if the date of disposal
for the residential land is within 2 years of—
(a) the date on which the instrument to transfer the land to the
person was registered–
(i) under the Land Transfer Act 1952; or
(ii) under foreign laws of a similar nature to the Land Transfer
Act 1952, if the land is outside New Zealand; or
(b) their date of acquisition of the land, if the land is not
registered as described in paragraph (a) at the date of
disposal.”

5. Residential Land
‘Residential Land’:
(a) means—
(i) land that has a dwelling on it:
(ii) land for which the owner has an arrangement
that relates to erecting a dwelling:
(iii) bare land that because of its area and nature is
capable of having a dwelling erected on it; but
(b) does not include land that is used predominantly
as business premises or as farmland.

6. Disposal within 2 years
Test applies if there is less than 2 years between:
1. Purchase (which is after 1 October 2015) being
the earlier of:
a)date of registration of purchase; or
b)date of acquisition of land (latest date on which
person acquires an estate or interest) if it is not
registered at the date of disposal.
2. Sale / ‘Date of Disposal’ being the earliest of
the date of the agreement, date of gift of land, date of
compulsory acquisition or date of disposal by
mortgagee.

7. Exceptions from Bright-line Test
1. Main Home exclusion:
• Test does not apply if the land was used
predominantly for a dwelling that was the seller’s
main home (dwelling mainly used as a residence
or if more than one residence applies then with
which the person has greatest connection).
• If land held in a trust then exclusion can apply if:
o the land was the main home for a beneficiary;
o the settlor does not own a main home; and
o if the settlor is a beneficiary of a trust owning the
settlor’s main home it is that main home which is
being disposed of.
• BUT cannot use the Main Home exclusion more
than twice in the last 2 years.

8. Further exceptions
2. Land transferred to executor, administrator or
beneficiary on death of a person.
3. Transfer of land pursuant to a relationship property
agreement.
‘Anti-avoidance’ type provisions mean that the test will
also apply to:
• The sale of shares in a residential land owning
company;
• Changes to a trust holding residential land,
where the purpose or effect is to defeat the test.

9. Residential Land Withholding Tax
The IRD is concerned about how it will collect tax from
vendors overseas.
Accordingly there is a proposal that if the bright-line
test applies and the seller is an “offshore person” then
a portion of the sale proceeds (lesser of 33% of gain
and 10% of the price) be withheld at the time of sale
and paid to IRD as a pre-payment or bond against any
tax due.
If the proposal is implemented it is expected that this
RLWT would apply to sales after 1 July 2016.

10. Residential Land Withholding Tax
The IRD is concerned about how it will collect tax from
vendors overseas.
Accordingly there is a proposal that if the bright-line
test applies and the seller is an “offshore person” then
a portion of the sale proceeds (lesser of 33% of gain
and 10% of the price) be withheld at the time of sale
and paid to IRD as a pre-payment or bond against any
tax due.
If the proposal is implemented it is expected that this
RLWT would apply to sales after 1 July 2016.