Could property owners be stung by the “Bright-Line” test?

Property TaxThe “bright-line test”, which was introduced last year to help cool the New Zealand property market, may catch property owners out by exposing them to what could potentially be a large tax burden.

The test applies to residential property purchased after October 2015 and means if you dispose of your property within 2 years of purchase, you may be required to pay income tax on any increase in the property’s value during this time. There are some exemptions which apply where the property is used as a main home, is inherited or was transferred due to the breakdown of a relationship.

In the past, it was commonplace for purchasers to enter into agreements to purchase property in one party’s name, with plans to later nominate another party to complete the purchase at settlement. For example, one spouse or partner may have signed the agreement in the first instance with the intention being that the other spouse or partner would be a joint purchaser later down the track. Another example may be that the original purchaser signed the agreement before seeking legal and accounting advice and is later advised that they should nominate a trust or company to complete the purchase. This was acceptable in the past but this practice should now be reconsidered.

A black and white reading of the legislation creating the bright-line test indicates that nominations of this kind are “acquisitions” and “disposals” of interests in land.  This means, if the value of the property has increased between the date the agreement was signed and the date the purchaser nominated another party to complete the purchase, income tax may be payable by the original purchaser. This is yet to be tested by IRD or the New Zealand Courts.

This issue is particularly prominent for purchases that are “off the plans” where the settlement date may be some time down the track as the relevant infrastructure may need to be put in place before settlement, a new title for the land may need to issue or a house may need to be built. In these circumstances, the 2 year timeframe runs from the date the original agreement was signed until the date the transaction is settled. As the purchaser has not been physically living in a house on the Property during this time, the main home exemption would not apply and if the purchaser wants to nominate another purchaser to complete the purchase or “on-sell” the Property during this time, income tax may be payable if the property has increased in value.

Given the recent significant increases in property values in the Queenstown Lakes region, the implications of the above could be costly to those who have entered into agreements to purchase property after October 2015 with the intention to change the purchasing entity before settlement.

If this applies to you, please contact us to discuss and remember to always talk to us before entering into agreements, or at the very least before you confirm the conditions. As your advisor we can then outline how the new bright-lines test applies to you and minimise any unintended snags in the process of purchasing your new property.