How the new Brightline Test may affect you
Property Tax Rules changed on 1 October 2015, with the new bright-line test requiring a vendor to pay tax on capital gains on residential property bought and sold within two years. There will however be three exceptions to this rule:
1. If the property being transferred qualifies as your Main Home (as that term is defined (“the Main Home Exemption”);
2. If the property is transferred under a property relationship agreement; or
3. If the property is transferred by an executor or administrator for a deceased person’s estate.
It is important to note that you can however only use the Main Home Exemption twice over any two year period. You are also not eligible for the Main Home Exemption if you show a regular pattern of buying and selling residential property. You can only live in one Main Home, and that is the home to which you have the greatest connection.
What happens if I have a trust?
Residential properties held in trust can use the Main Home Exemption if the house sold was the 1. Main Home of the principal settlor of the Trust; or 2. the principal settlor doesn’t have a Main Home, and it is the Main Home of a beneficiary of the Trust.
What do I need?
When buying, selling or transferring property in New Zealand, you will need to provide your New Zealand IRD number, and your tax pay identification number from any countries where you have to pay tax on your worldwide income. You will also need to complete a Land Transfer Tax Statement (Tax Statement) and provide this to your solicitor so that they can enter the relevant details into the e-dealing with Land Information New Zealand that has been prepared to effect the transfer.
Family trusts which own the family home but do not own any income earning assets, are unlikely to have an IRD number. In order to complete settlement of property transactions, the trustees must apply for an IRD number. This process can take up to 2 weeks.
To avoid delays in settlement, we strongly recommend applying for an IRD number before you even start the buying or selling process, as your transfer cannot be registered without an IRD number for your trust. The forms for making an application for an IRD number are available online and, in the case of trusts, the applicant will need to provide a copy of the Trust Deed along with the tax details of each trustee. The Inland Revenue will then issue the trust with its own IRD number which is entirely separate to that of the trustees. You will also need a fully functional New Zealand bank account as you will need to include this on your IRD number application.
It is important to note that the two year period from which the bright-line rule applies starts from the date the transfer is registered with Land Information New Zealand.
Both vendors and purchasers need to make sure that the information they provide in their Tax Statement is correct as knowingly giving a false statement may result in a fine of up to NZ$25,000.00 for a first offence.
Exemption from providing tax details
You may also be able to claim an exemption from providing your tax details in the Tax Statement if:
1. The land being transferred qualifies as your Main Home;
2. You are disposing of the land as part of a mortgagee sale;
3. It is a court ordered sale or statute ordered sale;
4. You are acting as a transferor on behalf of a public authority as defined in the Income Tax Act 2007;
5. You are acting as a transferor or transferee on behalf of a local authority as defined in the Income Tax Act 2007;
6. You are acting as executor or administrator for a deceased person’s estate.
Existing Tax Laws Still Apply
Vendors should not overlook that existing tax rules still apply to dealings in land where the property was purchased and sold within 10 years. Typically, these rules affect people that have been in the business of dealing with land, builders and developers or where the land has been subdivided.
We strongly suggest that you contact or your accountant at an early stage of any property transaction to assess your tax position.
Please contact our Property Team if you have any questions.