The Bright-line Test
Every three years when the General Election takes place, New Zealanders are divided into two distinct groups: those who believe that we should introduce a Capital Gains Tax to bring us in line with the rest of the world, and those who strongly believe that a Capital Gains Tax is unnecessary and unfair. However, our own version of a Capital Gains Tax, the Bright-line Test (sometimes called the Bright-line Rule), often goes unnoticed.
The Bright-line Test came into effect on 1 October 2015, when the Government decided that a home owner would have to pay income tax if they sold any property that was not a main home within two years from the acquisition date. On 29 March 2018, the two-year period was extended to five years. Now, as of 27 March 2021, the Government has announced that this period has been extended to ten years for all homes that are not new-builds, or fall within a list of exemptions. Predictably, this decision has caused a fair few ripples throughout the country.
As mentioned above, there are several exemptions to the Bright-line Test. The most relevant exemption is the main home exemption, which means that any person selling a property within ten years of the date of acquisition does not have to pay income tax if that property was their main home. It is important to keep in mind that the main home exemption is not infinite, and can only be used twice in a two-year period.
- Change-of-use Rule
- It is also important to be aware that the rules of this exemption have changed. Prior to 27 March 2021, a property was considered a main home for the purposes of the Bright-line test if the owner lived in it or used it as a main home for at least 50% of the time that they owned it. Now, the Government has introduced a change-of-use rule, which states that, after a sale, income tax will be payable for any period of over twelve months if the property was not being used as a main home. For example, if a home-owner was to move overseas for a year and a half, income tax would be payable for that period of time as the property was not being used as a main home.
- First Home Buyers
The Government has stated that the purpose of these changes is to provide greater opportunities to first-home buyers, however many people have commented that these price caps are still too low to be effective, considering the astronomical growth we are seeing in the current market.
Whether you are purchasing your first home or your tenth home, it is important to remain informed about the recent changes in the property sector, as the consequences of these changes will be far-reaching and will impact the way we purchase homes in the future.
This article is not a replacement of legal advice. If you have any questions about these new changes, please do not hesitate to contact us to discuss your individual circumstances.