The Bright-line Test

In 2015, the government introduced the “bright-line test”, a method which attempts to tighten the property investment rules.

Under the bright-line test states (subject to exemptions) any gain from disposing of residential land within two years of acquiring may be taxable. The test only applies to residential land. Residential land is land that has a dwelling on it or could have a dwelling on it and does not include farms or business premises.

The bright-line test applies where a person acquires residential land on or after 1 October 2015.

For standard sales, the two year bright-line period starts when title for the residential land is transferred to a person under the Land Transfer Act 1952 and ends when the person signs a contract to sell the land. Main homes are exempt from the rule.

In simple terms, when a person purchases their main home after 1 October 2015 and then sells it within two years, the income they receive for the sale is not taxable. A person can only have one main home to which the bright-line test does not apply. If a person has more than one home, it is the home that the person has the greatest connection with that is considered the main home for the purposes of the test. Factors to assess when determining what constitutes a main home include; how often a person uses the home, where their immediate family is, where their social and economic ties are and whether their personal property is in the home.

The test is based on actual use of the property and not just a person’s intention to use the property as a main home. This exemption cannot be applied on a proportionate basis; therefore, if a house is used only partly as a main home, the exemption does not apply. Trustees of a family trust cannot claim the main home exemption at the time of sale and purchase but the exemption may still be available to a settlor or beneficiary under certain circumstances. The main home exemption cannot be claimed more than twice in the previous 2 years at the time of selling.

Where property is inherited by a person as a beneficiary and they subsequently sell the property, the disposal will not be subject to tax under the bright-line test. Where property is transferred between partners or spouses under a property relationship agreement, there are no tax implications. However, if the property is subsequently sold; the bright-line test may apply.

There have been cases where tax obligations arose through the disposal of residential property which did not result in financial gain to the seller. As a result, it is highly recommended that specialist advice is obtained in respect of all property transactions.