New Zealand is one of the few countries where a comprehensive capital gains tax system doesn't exist. That said, there are a range of rules on our statute books that do tax land sales. Probably, the most commonly known test is what’s referred to as the the ‘bright-line test’. This is interesting, because despite being widely known, the bright-line test sits behind all the other tests laid down in the Income Tax Act and is only relevant if none of the other land tax provisions apply.
The bright-line test was originally introduced in October 2015 by the National Government in an attempt to ensure property speculators paid their fair share of tax on gains they made on buying and selling residential land. Under this original test, sale proceeds from property sold within two years of purchase would see the capital gain taxed. Certain transactions were exempt from the test. For example, where a property was used as a main home, the test did not apply.
On 29 March 2018, the two-year period was extended to five years by the Labour Government, who then extended it again to ten years in March 2021. Properties newly constructed whilst not being exempt, were given favourable treatment in that their applicable period was five years opposed to the legislated ten years. As can be imagined, these different timeline extensions caused much confusion. Application of the relevant time period was depended upon the date a purchaser acquired an interest in the property, which wasn’t necessarily the same date as when they purchased the property, and when they sold the property.
National was intent on clearing away the confusion the bright line test rules caused. Accordingly, the Government changed the bright line test period, decreasing it from ten years to two years. Under the newly enacted rule, from 1 July 2024, gains made on residential property sales are taxable if the property is sold within two years of its purchase date. Exemption to the application of the bright line test still includes the main home, farmland and land used for business premises.
As the shorter time period of two years prevails in respect of all land sales from 1 July 2024 onwards it is much simpler to work out whether a transaction falls within the test period or not. It also makes a considerable difference to residential property vendors.
Example
Take for instance a property purchased by Catherine on 22 June 2022. She decides to sell this property on 29 April 2025. The sale subsequently settles in 1 September 2025. Under previous rules, the gain Catherine makes on the sale of the property would be taxable because she sold the property within ten years of acquiring it. Under current rules however, the gain will not be taxable because Catherine has owned the property for 3 years, 1 month and 11 days at the date of sale, and the sale has occurred after 1 July 2024.
Other than being asked by clients if their sale transaction is taxable, clients are interested in knowing how much tax they have to pay on a taxable land sale. As to be expected, costs such as real estate fees, costs of renovations, lawyers’ fees, etc can be deduced from the gain made. Tax payable is calculated on the net gain at the individual’s income tax rate. Going back to our above example, if Catherine had made a $100K taxable gain, she would have been able to deduct the real estate fees of $25K and renovation costs of $15K that she paid from the profit. Hence, tax would be payable at Catherine’s personal income tax rate on $60K rather than the $100K total gain made.
New Zealanders are known to have wandering feet and many of us move homes multiple times in our lives. So, the question arises can we use the bright-line family home exemption multiple times? For instance, what happens if we have three homes in two years?
Under the rules, the main home exemption is not available when you have used it twice or more in the two years immediately prior to the current house sale. Furthermore, IRD can assert you are engaging in a regular pattern of buying and selling your main home. Ultimately, this can mean the denial of the bright-line family home exemption with a resulting tax liability.
Many trusts hold property and sometimes more than one home. For instance, often a family home and a bach will be held within a trust. This begs questions such as can the bright-line main home exemption be used for a home held within a trust as opposed to being owned by an individual personally? If so, where there are two homes within the trust, what home can the exemption be applied against?
Under current law, if a trust beneficiary occupies a property as their home and the principal settlor of the trust does not have a main home (eg: outside of the trust), the exemption will apply. The bright-line main home exemption can only be used once however. Hence, if a trust holds both a family home and a bach, one of these properties could be liable to tax.
To determine which property would enjoy the exemption, a test is applied. Pursuant to that test, factors such as where you spend most of your time living, where your immediate family live, where your social, business and economic ties are the strongest, and where you keep most of your personal items are taken into account to determine what property the exemption must be applied to.
Kiwis are entrepreneurial by nature. This lends them to starting businesses. Unfortunately, not all businesses are financially successful, and many have to be closed with debt on their books. When that occurs, assets held by the owner of the business may be attacked by its creditors. It is for this reason trusts are so popular – they provide asset protection of an individual’s assets against liabilities of a business. With this in mind, prior to starting businesses, owners want to transfer their homes into trusts. The question clients frequently ask us is will their home be subject to bright-line tax if they transfer it to a trust within two years of owning it. Fortunately, roll over relief exists in these circumstances provided certain criteria is satisfied which we always check when we provide advice.
New Zealand doesn’t have a comprehensive capital tax regime but there are legislative tests which do tax gains made on land sales. Besides from the bright-line test, the Intention or purpose of resale test, the associated persons or closely connected to test and the rezoning provisions are three examples that come to mind. These are by no means the only tests the Income Tax Act provides for that tax land sale gains.
As with the tests mentioned, application of the bright-line test can also mean gains made on a property sale are taxable unless an exemption such as the main-home exemption applies. We’ve elaborated on this exemption briefly in this article, but reader should be aware ... the devil is in the legislative detail, so it pays to obtain advice from your Accountant at Greenlion before taking steps to sell your home.
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