Since late March, there has been much talk about the Labour Government’s recent extension of the Bright Line Property rule which came into effect from 27 March 2021. The rule is extremely far-reaching and allows the government to “clip the ticket” for up to 40% tax on any capital gains made on the sale of a residential property that is not the main home. In short, the revised 10-year bright line test (which significantly taxes the gains from the disposal of residential property), now applies to residential properties acquired after 27 March 2021 and sold within 10 years of that date. Previously, under the National government, acquisitions of residential property between 1 October 2015 and 28 March 2018 and sold within two years attracted the tax. Upon its election win in 2017, the Labour government, almost immediately increased the bright line rule to five years for acquisitions between 29 March 2018 and 26 March 2021, and which has again increased to 10 years.
Commentators think this is extreme and unfair, given many families and their situations can change significantly and dramatically over a 10-year period. Labour believes that New Zealanders who own one home (i.e., the main home) are protected. However, what is not been made very clear to the public is that the main home rule only applies so long as the owner uses the home as the main home for the entire period it was owned i.e., 10 years. A new “change of use” rule applies if the main home is not used as the main home. For example, if the main home is rented out for periods greater than 12 months within the 10-year period due to, for example, the transfer of a job. Where the change of use rule applies, the owner will have to pay tax on a proportion of the increase in value of the property during the period of ownership.
Consequently, in these scenarios, a home-owner is well advised to keep very accurate and excellent records of any change of use and why, as well as retaining any supporting evidence, for example agreements, accounting records, timelines and bank statements. Inland Revenue has released a “formula” to determine any taxable profit and therefore good accounting advice is highly recommended to all home owners who change the use of the main home in any 10-year period. The change of use rules do not apply to residential properties acquired after 29 March 2018 and before 27 March 2021 (i.e., the 5-year bright line test period). In these cases, the “all or nothing” main home exemption applies if the property was used for most of the bright line period as the main home. Given the now complicated, far reaching and long-term effects of the Labour government’s tax on the sale of New Zealand’s residential real estate, all property owners should seek solid advice before and during ownership of any property to ascertain their taxable position.
This article was written by Gina Jansen, Managing Director of Gina Jansen Lawyers Ltd, and was reproduced in the West Auckland publication “Window on Swanson” in June 2021. Disclaimer: the content is not to be reprinted without the express permission of the author, nor is it intended to be relied upon or quoted as legal advice. Contact Gina Jansen Lawyers for legal advice.
Gina Jansen Lawyers are based at 9C Moselle Ave, Henderson, West Auckland but provide nationwide legal services with offices by appointment in Raglan and Ngaruawahia in the Waikato. Gina Jansen is an Accredited Specialist of the Property Law Section of the New Zealand Law Society. The above article is not legal and/or financial advice and is intended as a guide only and cannot be relied upon as legal advice. Legal advice specific to your circumstances should always be obtained. Our legal services include: property, conveyancing, trusts, estate administration, wills and enduring powers of attorney, relationship property settlements, divorce, Inland Revenue tax debts and disputes, bankruptcy, liquidation, commercial and business law. We welcome enquiries by phone or email. We can provide referrals to a highly recommended group of chartered accountants, insurance brokers, financial advisers, mortgage brokers. Contact us for details by phone on 09 8695820, 0800 544508, or refer to our website https://www.ginajansen.co.nz.