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Tax Updates: 30 October 2023
Welcome to this week’s review of tax issues where Richard comments on what’s been happening in the world of tax over the past week. If you have a question or would like a second opinion on any national or international tax issues, please contact Richard via email at firstname.lastname@example.org.
Bright-line; not the only consideration
It was a quiet week post Election, with little coming across my desk that I thought would interest you all.
Questions have already started, however, regarding the proposed change to the residential bright-line rules, more specifically, the reduction in the bright-line period from 10 years to 2 years – as it was when the National government first introduced the bright-line rules with effect from 1st October 2015.
While it’s likely to be a few weeks before we see anything in the nature of the draft of the proposed legislation to effect the promised amendments, my present understanding is that the new two-year period will apply to residential land acquired post 1st July 2024. However equally, if the residential land being disposed of was acquired pre 1st July 2022, then the disposal will also not be subject to bright-line taxation.
What I would like to share with you this week, while it is relatively quiet and certainly connected to these recent bright-line related enquiries, is a timely reminder not to overlook some of the other land taxing provisions that could still apply to the disposal, even if the bright-line rule will no longer apply simply because the residential land has been owned for more than 2 years.
It has certainly been my experience since the bright-line rules were introduced in 2015 that most residential landowners who directly contact me (as opposed to perhaps having their own accountant whom they contact first) often are only aware of the bright-line test. Consequently, they think that if they can negate the application of the bright-line taxing provision, they are “in the money” and will be banking a nice, non-taxed capital gain for themselves.
Unfortunately, however, I’m often having to deliver some bad news, predominantly due to the following three taxing provisions, which have been around well before the bright-line test was conceived:
- Land acquired for an intention or with a purpose of disposal – in my view, the primary reason why the bright-line rule was introduced in the first place. To completely remove any interpretative issue, the taxpayers subjective (viewed objectively) intent or purpose may have been when they acquired the land (executed a binding agreement to purchase the land). It certainly has made the Revenue’s job so much easier – purchase and resell residential land within the applicable bright-line period, pay tax on the disposal gain unless you can claim the main home exclusion. Plain and simple, black and white. However, this taxing provision has remained in place throughout bright-line’s relatively short existence. More importantly, while bright-line will only tax the disposal if the land is actually disposed of within the applicable bright-line period, under the intention/purpose rule, once the taxing provision is triggered, the land disposal is subject to tax whenever sold.
- The minor subdivision rule – commence a development or subdivision scheme for your land within 10 years of the date the land was acquired. If the work involved is considered “more than minor”, then any disposal gain is potentially taxable. Once again, trigger application of the taxing provision (which notably only requires the commencement of a scheme and not completion), and the disposal of the land is taxable whenever sold (a common misconception that there is a 10-year limit) unless one of the four available legislative exclusions (or perhaps a non-legislative one) can be claimed.
- The rezoning rule – dispose of your land within 10 years of acquiring it, where you may have taken advantage of a land use change, which has the consequence of an increased disposal gain, and you may have to pay tax on that gain.
Now, on top of the aforementioned three examples, there are also potential tainting and associated person rules to consider, so the road to a potential tax-free capital gain paradise can certainly be tricky and fraught with dangers. Of critical importance is to be proactive and seek advice upfront before you do anything, as, unfortunately, more often than not, I am the ambulance at the bottom of the cliff, trying to take care of the damage that has already occurred.
Feel free to reach out to me if you need any help.
This article was originally published through the ‘A Week In Review’ newsletter. If you would like to receive Richard’s tax updates every Monday morning, you can subscribe here.