The Bright-line Tax Rules – Will We End Up Where We Started?

With a new government comes change, and it appears the National-led government is already full steam ahead. According to pre-election policies, it is likely we will see further changes to the “bright-line” tax rules. The National party wants to roll back the bright-line period to two years (instead of 10 years) by July 2024. The Act party wants to repeal the bright-line tax rules entirely. New Zealand First has no bright-line policy, but is in opposition to any comprehensive capital gains tax. So, will we end up where we started under a National-led government? 

Under the Income Tax Act 2007, if you buy property in New Zealand with the intention of reselling it, tax is payable on any profit you make from its sale (“intention test”). In 2015, the National Party introduced the “bright-line” tax rules to work alongside the intention test. This meant if you bought and sold residential property within two years, tax was payable on any profit from the sale, regardless of your intention (unless any of the exemptions applied). In 2018, the Labour party extended the bright line period to five years. If you lived in the property for at least 50% of the time you owned it, the main home exclusion could apply, meaning tax was not payable on any profit from the sale.   

In 2021, the Labour party extended the bright-line period to ten years, with an exception for new builds, which remained at five years. The meaning of “main home” changed so that the exclusion only applied to the period where the property was in fact being used as your main home. So, if you moved out of the property during the applicable period (ten years for most properties, five years for new builds), tax would be payable for the period that you did not live in the home. This has had unintended consequences for owners who have needed to move out of their homes while renovations were being completed or for those homes that became uninhabitable after Cyclone Gabrielle. 

There are some other exclusions to the bright-line tax rules, for example where land has been inherited, where a relationship property agreement exists or in some instances transfers to family trusts. If tax is payable, the transferor’s tax rate will be used. To ensure compliance with the legislation, lawyers are required to complete tax statements when properties are bought and sold, and this information is provided to the IRD.   

It will be interesting to observe what changes the government makes to the bright-lines tax rules and find out whether we end up back where we started. If you have any questions regarding the bright-lines tax rules, please don’t hesitate to contact our property team on 03 441 2743 or at [email protected].