Risk and Reward
27 Jan 2016
New legislation affects property sales made from 1 October onwards. The changes hit in a variety of ways.
Bright-line test and residential land
New tax rules now apply to residential property sales made from 1 October. A new ‘bright-line test’ will apply where a person who has purchased a residential property on or after 1 October 2015 then sells it within two years. The sale will be taxed unless the property is the seller’s main home, inherited from a deceased estate or sold as part of a relationship property settlement. The bright-line test does not apply to business premises or farmland.
How the start and end date of the bright-line test is counted varies with the type of sale and purchase it is. For instance, where it’s a standard purchase, the start date will be the date a person obtains registered title for the property and the end date will be the date of entry into agreement for sale. However, start and end dates will be calculated differently where the registration date may not take place immediately or be the definitive point of transfer - sales off the plan, sales of subdivided land, mortgagee sales or where property is gifted to a trust.
Selling the main home
The seller’s main home is exempt from the bright-line test. Where the seller has more than one home, their ‘main home’ is the property with which they have the greatest connection. Just to prove that the tax system has a sense of humour, a person will not be able to use the main home exception if they have already used it twice in the previous two years.
It may get tricky for family trusts where family assets are distributed between individual owners and the trust. If a trust owns the property being sold, the main home exception will apply when it’s the main home of a beneficiary of the trust. However, if the principal settlor of the trust has a main home that the trust doesn’t own, the main home exception cannot apply to any property owned by the trust.
Claiming tax deductions
There are provisions for allowable deductions when a property subject to the bright-line test is sold. However, where losses arise as a result of the bright-line test they have been ring-fenced so they may only be offset against taxable gains arising on other land sales. It is not possible to claim a loss arising from a transfer of property to an associated person.
Companies and trusts
Inland Revenue will keep a close eye out for where land-rich companies and trusts try to get round the bright-line test. They may view a transaction as subject to the bright-line test where:
- 50% or more of the shares within a 12-month period are sold
- there is a change in the trust deed
- a decision-maker under the trust deed changes
This applies where at least 50% of the value of the company or trust is attributable to residential land either directly or indirectly.
Please contact us if you are considering buying or selling residential property; your company is thinking about a large scale share transfer; or there are any changes to the family trust’s trust deed or trustees.
You might also like to have a catch up with us on whether the changes affect your tax profile or investment strategy.