Bright where it hurts? A summary of the new property tax legislation and the 'Bright Line' test

Article Published : 14.12.2015

From 1 October 2015 new tax identification requirements were put in place for property transactions. Meanwhile, the Government has introduced further changes in the form of a long anticipated ‘capital gains tax’ which also have effect from the 1st October.

Disclosure changes

As at the 1st October this year, tax statements are required for all property transactions dealing with freehold, leasehold and unit title properties, as well as licenses to occupy.

These tax statements require provision of IRD numbers for every vendor and purchaser. The statements also ask three main questions:

  1. Does the transfer involve land that has a home on it?
  2. Are you or a member of your immediate family a New Zealand citizen, or a holder of either a resident, work or student visa?
  3. If you are a buyer and you or a member of your immediate family hold a work or student visa, do you or a member of your immediate family intend living on the land? 

If the property is owned by a Trust or company, then the appropriate Trustees or Directors are required to fill in tax statements using the IRD number of the Trust or Company. Many family trusts and some holding companies may not have IRD numbers and will have to apply for one in preparation for settlement. This process can take up to 10 working days to complete and is an important consideration in the timing of how a contract might progress.

The position is similar where a party to a transaction is an overseas person or entity. In such a case applications for bank accounts and IRD numbers are likely to be necessary.

Tax statements including the above information are mandatory unless one of the following exceptions applies:

  • The property can be classed as the ‘main home’, which generally means that it will be used as a dwelling by the party claiming the exception for at least 50% of the calendar year. This exception can only be used twice in two years.
  • The property is the subject of a Treaty of Waitangi Land Settlement.
  • The property is classed as Maori Land under Te Ture Whenua Maori Act 1993.
  • The contract has been entered into prior to 1 October 2015.

Disclosure requirements will differ depending on the specific circumstances of each transaction, and even where one of the above exceptions is being claimed certain formalities still need to be complied with.

The ‘Bright Line’ Test

Historic attempts to tax the buying and selling of residential property involved looking at the intention with which the property was acquired. The Bright Line Test puts a more clear-cut spin on things. In general terms it states that where a property is disposed of within two years of its acquisition then any profit derived from the sale will be taxable. The legislation bringing this Test into force emerged in November this year and, like the disclosure rules, is subject to some exceptions. Generally speaking, property disposals will not be taxed where:

  1. The property in question was acquired before 1 October 2015;
  2. The property is predominantly used for business purposes;
  3. The property is used predominantly as the home for the party that is involved in the transactions and they have not disposed of their ‘home’ more than twice within two years. This echoes the 'main home' exception to the disclosure requirements above.

These exceptions require further examination where the property is vested in a trust or company. Additionally, even if a property has been owned by the same party for more than two years, a transfer of this property will still be subject to the old rules looking at the intended purpose for which it was acquired.

In the event that a transaction is caught by the Bright Line Test, tax deductions may still apply to any tax paid so it will be important to liaise with your accountant on how the numbers will stack up in the end.

New Zealanders place great importance on property transactions. The 'family home' is where generations are nurtured but it is also a vital source of equity often used to fund future investments. The new legislation touched on above will affect the viability of some ventures, and as such it is essential to seek timely and accurate advice with respect to future property dealings.

Take home messages

  1. If you are buying or selling residential property then you will need an IRD number unless your situation falls within one of the exceptions.
  2. The exceptions are limited and whether they are applicable will depend on the specific circumstances of the property being transferred.
  3. If you are living overseas or entering a contract through a Trust or Company, then you may need to apply for an IRD number. This process takes time and you must ensure that contract allows for this to occur.
  4. Tax statements must be completed and signed by the parties to the contract even where one of the exceptions is being claimed.

Article by Andrew Logie

Andrew joined Malley & Co in 2015 after working in several junior positions under experienced members of the profession. Since then, Andrew has gained experience in a wide range of commercial transactions including business sales and purchases, company restructures, business financing and all forms of commercial property dealings.

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