Thanks to Maximillian Conacher for the image
In October 2015, the National Government introduced the Bright Line Test on land transactions. This was an attempt to slow down the runaway property market by imposing extra "costs" on land transactions that fall within the ambit of the Bright Line Test!
The government didn't really have a choice - the dreaded Capital Gains Tax is political suicide and the runaway property prices was hurting the government's chance for re-election (oh yes! & the public). So, quite brilliantly, they applied what is common in some European countries.
It is obviously working as CoreLogic data shows that 7% of the Auckland sales in 2016 were properties that were sold within a year compared to 11.7% at the peak of the last boob during mid-2000.
What is Bright Line Test?
The new legislation sought to tax the sale of investment properties sold within two years of acquisition. Exempt are main family homes owned by individuals and family trusts (subject to a few other minor requirements being met).
The test is not particularly sophisticated and being simple and straightforward - its catching kiwis off guard!
Conceptually, there is not much problem with the test - the government is saying that if you're holding and selling real estate frequently, but not frequently enough to be called a "dealer", then its no longer a capital gain (& therefore exempt from tax!) - it is income and so you have to pay income tax on the gain / profit (at your maximum marginal rate!)
How is the profit calculated?
The gain / profit is calculated as [Net Sale Price (∑ Sale Price less Cost to sell the property) Less Purchase Price].
The Bright Line Test catches fewer than what a blanket Capital Gains Tax legislation would have caught if enacted, but is more brutal in that
How IRD has applied the Bright Line Test?
A few things to remember about the Bright Line Test as were highlighted by recent cases
Overall the simple message is: before you sell real estate, check with your Core Business Services advisor about your exposure to the Bright Line Test.
The above publication discusses income tax issues generally and is not intended to be specific tax advice. Whilst every effort has been made to provide valuable, useful information, Core Business Services Ltd, any related suppliers, associated companies & practices accept no responsibility or any form of liability from reliance upon or the use of its contents. Any suggestions should be considered carefully within your own particular circumstances, as they are intended as general information only. Please do consult with your tax advisor or call this firm for information / advise specific to your circumstances before finalising any particular course of action.