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Land and the bright-line test – a beginner’s guide
It’s always good practice to commence a guidance article like the one you are about to read, with a disclaimer and a warning.
Firstly, the writer has prepared this document purely from the perspective of attempting to provide some guidance to the reader, surrounding the basic principles of the bright-line test. It is intended to be used solely for that purpose, it is not an advice document, and the writer accepts no responsibility or liability, should a reader use it for any purpose for which it was not intended by the writer.
Secondly, on the basis that the commentary below was drafted to provide general guidance only to the reader, it is strongly recommended that more specific advice from a qualified professional adviser is sought, which will then have direct application to the specific scenario under consideration at the time.
All legislative references below are to the Income Tax Act 2007 (“the Act”), unless otherwise stated.
Lesson number one: Are you actually dealing with residential land as defined?
Most people do understand that the bright-line rules only apply to a disposal of residential land. This is a defined term within the Act, which means:
- land that has a dwelling on it, unless the land is farmland, or is used predominantly as business premises;
- land for which the owner has an arrangement that relates to erecting a dwelling unless the land is farmland or is used predominantly as business premises; or,
- bare land that may be used for erecting a dwelling under rules in the relevant operative district plan unless the bare land is farmland or is used predominantly as business premises.
Note that the reference to ‘used predominantly as business premises’ is a reference to the person operating their own business from the land and does not cover a scenario where the person has leased their land to others who operate their business premises from the land.
Also important is that the rules apply to residential land held anywhere in the world by the person, not just residential land within New Zealand.
Lesson number two: Appreciate the other land taxing provisions which may apply before the bright-line rules:
The Act contains ten separate specific land taxing sections, and while most people immediately jump to bright-line considerations (section CB6A), in terms of the pecking order, the rules only apply when seven other taxing provisions which come before it, do not.
Now you might think where you have a black and white bright-line case, why consider the other seven at all? Well, such considerations may be worthwhile, where the earlier taxing provisions may provide a better net outcome to the vendor. For example, if the vendor has had to sell at a loss, sure there is no bright-line tax payable, but equally the excess loss is not claimable against income from other sources the person may have, and equally, it is ring-fenced when carried forward, to only be offset against future land sales income. However, if a case can be made that section six (intention of resale, which applies in priority to bright-line) equally has application to the sale, then at least the door is opened to potentially claiming the loss sooner.
Lesson number three: It is the acquisition date, not the disposal date, which dictates which bright-line period applies to the land:
It’s relatively common when somebody calls me with a bright-line question, that they think that the bright-line period of the day applies to their disposal, and not that which existed at the time they acquired their land.
In general terms (I say generally because there are some special rules so keep this point in the back of your mind, e.g., an off the plans purchase), the date of acquisition is the date a binding agreement to contract was signed (even if still conditional). Once you have confirmed the correct date of acquisition, then based on this date, check what bright-line period existed at that time. This becomes even more important if you signed an agreement prior to a law change, but the settlement date (and title transfer, therefore) occurred post the law change.
Yes, the title transfer date commences the bright-line period clock, but the length of that period will actually be determined by the acquisition date for the land. I had a very happy client recently, who thought he had bright-line tax to pay because he had received the title in August 2018 (when a 5-year bright-line period existed). However, he had signed the agreement to purchase in December 2017 and was therefore only subject to the 2-year bright-line period that existed at that time. So, selling in 2021 had the consequence that section CB6A had no application to his disposal.
Also note that the date that the person enters a contract to sell their land, is the relevant date for checking whether disposal has occurred within the applicable bright-line period.
Land acquired pre-1st October 2015 – no bright-line tax exposure
Land acquired 1st October 2015 to 28th March 2018 – 2-year bright-line period
Land acquired 29th March 2018 to 26th March 2021 – 5-year bright-line period
Land acquired 27th March 2021 and is “new build” land when sold – 5-year bright-line period
Land acquired 27th March 2021 – 10-year bright-line period
Lesson number four: If land acquired post 27th March 2021 contains a ‘new build’ when disposed of, a 5-year bright-line period applies:
For land acquired post 27th March 2021, the bright-line period increased to 10-years. However, to ensure that the new housing supply was not negatively impacted by the extended length of the bright-line period, a ‘new build’ concession was drafted.
So, where a new build (self-contained residence or abode and CCC is issued post 27th March 2020) is added to the land, if the new build remains on the land when sold, a 5-year bright-line period will apply. A person can either buy new-build land (within 12 months of the CCC having been issued) or erect a new-build upon the land they already own.
Note that if the land already contains a dwelling that does not satisfy the ‘new build’ criteria, then you may have an apportionment issue – a portion of the land having a 5-year bright-line period and the remainder having a 10-year bright-line period.
Lesson number five: Once bright-line has application, there are very few exclusions:
The bright-line rules are very black and white, dispose of your land within the applicable bright-line period, and unless you can claim the main home exclusion, the tax will be payable regardless of the reason why you had to sell – financial hardship for example.
The only two exceptions applying to residential land (farmland and business premises are excluded from the residential land definition) are in relation to inherited land and land transferred as part of a relationship property settlement.
Lesson number six: The ‘main home’ exclusion has recently changed:
For land acquired pre-27th March 2021 (remember acquisition date, not settlement date), the ‘main home’ exclusion rule was essentially an all-or-nothing rule. You either satisfied both 50% ‘use’ requirements and the exclusion meant no bright-line tax was payable on the disposal, or you didn’t, and the whole disposal gain was then taxable.
So, under the 50% use rules (useful to know because they still apply to pre-27th March 2021 land acquisitions), you had to ‘use’ the residential land for main home purposes (and a person could only have one main home at any time) more than 50% of the time you owned the land, and of the land itself, more than 50% had to be used for the main home purposes.
The new main home exclusion rules are arguably fairer because in essence you will only be taxed on the portion of the land not used for main home purposes (so if you had two dwellings on the one piece of land, one being the family home and one an investment property), or with respect to the main home portion of the land if it is not used for main home purposes for more than 365 consecutive days. Say you went overseas for 14 months, for example, living on the land as your main home before you departed and re-occupying upon your return. If you then owned the land for eight years (a 10-year bright-line period), you would only pay bright-line tax in relation to the 14-month absence.
Importantly, under both ‘main home’ exclusions, what your intentions were with respect to the land are irrelevant. It is only the land’s actual use that is considered when considering the application of the exclusion.
Lesson number seven: New roll-over rules have just been introduced applying to transfers of land occurring post 1st April 2022:
If the transaction under consideration arguably involves no economic change of owner (settlor to their family trust, person to LTC/partnership, joint tenant to tenant in common, etc), then potentially roll-over relief will apply, in part or in full.
If the transferor is effectively not making a gain on the transfer, so settling their residential land upon a family trust for no more than their original cost, then full roll-over relief may apply. Under full roll-over relief, the transferee effectively steps into the transferor’s shoes in terms of bright-line purchase date and cost.
If, however, the transfer is for more than the transferor’s original cost, then only partial relief will apply, which just sees the transferee obtaining the transferor’s acquisition date, but the cost will equate to the price paid to the transferor (which could result in bright-line tax payable for the transferor).
Lesson number eight: Subdividing the land does not restart the bright-line date when the new titles for the land are issued:
Under this scenario, the landowner’s bright-line acquisition date remains that at which the original undivided piece of residential land was acquired.
Thanks for reading! Should you have any questions regarding this guidance, please reach out and I will be more than happy to provide an opinion for you.