The bright-line test was originally introduced in 2015 by the National Government to discourage speculators entering the market flipping houses for a quick gain. Yesterday the Labour Government has argued that this was not enough and proposed to extend the bright line test to five years.
The bill could have gone to select committee but avoided a lengthy process by being put into a routine tax bill.
What exactly is the bright-line test?
The bright-line test was intended to supplement the "intention test" found in the Income Tax Act 2007. The intention test determines the purpose of property purchase, whether it was purchased with intention of disposal. If so, the gains from the sale should be taxable. The IRD realised that the intention test was very heard to apply, as it was difficult to prove people's orginial intentions. And so, the "bright-line test" was introduced. It was a clear and unambiguous rule that started that if someone purchased the property after 1 October 2015 and sold it within two years, the gains made should be taxed. This test removed the need to consider personal intentions case by case. The latest change is the new extension covering a longer period of five years instead of two.
Will my recent property be effected?
As it stands, all residential properties purchased before the bill enactment date (yet to be announced) will still be subject to the two year bright-line test.
What is the tax rate?
The rate will be the same as the seller's (personal or entity’s) income tax rate
Are there any exemptions?
Yes. The bright-line test doesn't apply to the family home or death estate or property sold as part of a relationship settlement. Although if you show a pattern of buying and selling a personal home often, you may get caught as a trader.
Does it have an effective date yet?
There has not been an effective date announcement yet. The bill now awaits the Royal Assent to become law, which should take a few days.
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