Following on from Brett Carpenters blog last week the New Property Tax Rules – post budget 2015, Brett talks this week about the proposed Bright-Line Test.
The issues paper describing the proposed Bright-Line Test has been released. To download the PDF version of this blog click here
Make no mistake – this is a capital gains tax. It will tax gains made on the sale of residential land sold within 2 years of acquisition.
The issues paper starts off by conceding how difficult the existing ‘intention test’ under the present rules is to enforce. I suspect it also highlights how reluctant tax collectors are to try and enforce those rules.
Under the new rules you will be subject to tax on the profit (less deductions under the usual tax rules) where you acquire a property and sell it within 2 years of acquisition.
Dates of Acquisition and Disposal
Curiously the rules under the new bright-line test are different from the current rules which tax land sales.
The time period will commence on the date the transfer from the seller to the buyer is registered at Land Information New Zealand (LINZ) and will finish on the date the person enters into an agreement for sale and purchase of the property.
However the tax will only apply to agreements entered into after 1 October 2015. Where a property is acquired other than by way of sale, the bright-line test will apply only where registration of the transfer of the property occurs after 1 October 2015.
The rationale for the use of these dates is to minimize avoidance of the tax.
Where property is acquired by agreement ‘off the plan’ and is sold before the date of registration of the acquisition, the sale of that ‘right to buy’ will be subject to the tax if it takes place within 2 years of the date of the agreement to acquire the property.
• Dates of acquisition and disposal are usually determined by the date an agreement for sale and purchase is entered into because the fact of the agreement clearly evidences the intention of the parties. However in the Bright-line test, because it is a capital gains tax and not determined by the intention of the parties, the acquisition is measured by the date the transfer is registered and the disposal by the date an agreement for sale and purchase is entered into to avoid the date of sale being artificially deferred.
What is ‘residential land’?
Land which has a dwelling on it or for which there is an arrangement to build a dwelling on it.
It does not include land used predominantly as business premises or as farmland.
A bach or holiday home is unlikely to fall within the definition of ‘main home’ even though an owner does not personally own any other residential property.
• Main Home. Where the dwelling is occupied by the owner or, if the owner is a Trust, by one or more beneficiaries of the Trust;
• If the Settlor of a Trust has a main home that is not owned by the Trust, the main home exemption cannot apply to any property owned by the Trust;
• Inherited property will not be subject to the tax;
• Relationship property transfer will not attract the tax although a disposal within 2 years after the transfer might if the property is not the person’s main home.
Recognising that a considerable number of family homes in New Zealand are held in family trusts, the main home exemption allows a home owned by a trust to be regarded as a main home. However property owned by a trust will not be eligible for the exemption if a settlor of the trust (and for tax purposes a settlor is defined broadly) separately owns a main home or is a beneficiary of another trust that owns the main home of the settlor.
Anti avoidance rules to prevent a company being used to acquire a property and then sell its shares; or a change in trustees or beneficiaries of a trust or ownership of shares in a corporate trustee will also be introduced. The residential exemption will not apply to a person who engages in a regular pattern of acquiring and disposing of houses. The present tax rules already cover this.
Where a trust owns property, a disposal will be deemed to have occurred where any of the following are done with the purpose or effect of defeating the intent and application of the Bright-line test.
- A change in trustees;
- A change in beneficiaries;
- A change of the person holding the power of appointment of trustees and beneficiaries;
- A change in the ownership of a corporate trustee.
The legislation will provide the detail.
A person who sells a property which is subject to the Bright-line test rules within 2 years of acquisition will be able to deduct expenditure according to ordinary rules. This will include the cost of the property and other holding costs. However, despite the different nature of the present tax rules and the Bright-line test, holding costs which are not presently deductible will not become deductible under the new rules
Other Tax Stuff
The new rules providing for the collection of information on people buying and selling properties will enhance the ability of IRD to identify (and assess) people under the existing rules which are primarily based on the intention of the land owner.
Under the existing land sale rules costs can be deducted without limitation even if the ‘deductions’ exceed the proceeds of disposal.
Because of the perceived risks that the Bright-line test creates an opportunity for taxpayers to minimise their gains and maximise their losses, the new rules will ring fence losses arising only as a result of the Bright-line test so that they are only able to be offset against taxable gains arising under the land sale rules.
Where a person holds property on revenue account (i.e. as a dealer or developer of land) the present rules provide that on his/her death the beneficiary who inherits the property is deemed to hold the property on the same basis.
However, a concession in the Bright-line test rules will provide roll over relief to all transfers following a death. In other words a disposal by the beneficiary within 2 years of the transfer to the beneficiary will not be subject to tax under the Bright-line test. On its face this rule would appear to encourage a person to sell property within the 2 year period because a disposal after the 2 year period will not receive that concession and the sale will be subject to tax under existing rules.
This is to be contrasted with the treatment of relationship property. Whilst transfers pursuant to a Relationship Property Agreement will not be taxable, the sale of that property within 2 years will be subject to tax.