The bright-line test is a tool implemented in 2015, which essentially taxes gains made on residential property sold within a certain timeframe (subject to a limited number of exemptions).
The initial timeframe for the bright-line test was two years. However, the new Labour government is set to extend the bright-line test to five years, with this change anticipated to come into effect by the end of March 2018.
This means that if you purchase residential property and sell it within five years, then unless one of the exemptions applies you may have to pay tax on any gain you make. The new timeframe only relates to property purchased once this change is implemented, and therefore the two-year bright-line test will likely still apply to those who purchased property before the extension comes into force.
There are limited circumstances where the bright-line test will not apply. For example, if you are selling the home that you live in most of the time then the bright-line test will probably not apply (although there are a limited number of times you can rely on this exemption). Some other exemptions relate to inheritance, and situations arising from divorce or separation.
The longer time-frame may have unintended consequences for unwitting sellers. For instance, your understanding of the time you have owned your property may not line up perfectly with the timing considerations as set out in the law.
Additionally, changes to personal circumstances within the five-year period are much more likely to occur than under the two-year bright-line test, and this could trigger tax being payable in situations not anticipated by sellers. For example, the sale of a holiday home or rental property within the five year timeframe may mean that tax is payable on any gain made. It may be that these situations were not intended to be captured under the policy rationale for the introduction of the bright-line test in the first place.
It is important to take early legal advice when considering buying or selling property. If you are in that situation or have concerns about whether the bright-line test could apply to you, please contact our Wellington property lawyers – Jamie Nunns, email firstname.lastname@example.org, phone (04) 495 8912 or Zaneta Aislabie, email email@example.com, phone (04) 495 8911.
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