Bright-line extension to five years
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GRA Blogs
Articles by Matthew Gilligan
There are imminent changes to the bright-line test which will affect you if you are planning to buy or restructure investment property.
You are probably already familiar with the two-year bright-line test that was introduced in October 2015. Under this test, investment property that is sold within two years of settlement is subject to tax on any increase in value.
The Labour Government has always said they will extend this test to five years. On 15 February it was announced that the new five-year bright-line rule will apply to residential land acquired where the contract is entered into on or after the day that the new Act receives Royal assent. This is expected to happen in March 2018.
Therefore, while there is no exact date specified, there is only a limited time that the two-year bright-line rule will remain in force. As soon as Royal assent is granted, investment property purchases made after that date will be subject to the five-year bright-line rule.
In other words, you need to act fast if you are planning to buy or restructure investment property and you wish to avoid the five-year rule. Please contact us with urgency if you are planning to move your investment properties between entities so we can get this finalised before the new rules come into play.
There seems to be some general confusion around the extension to bright-line rule and under which circumstances it will apply. The case studies below should help to clarify. In both these examples, we will assume the five-year bright-line rule comes into effect on 18 March 2018 (we of course don't know the exact date, but it is useful to illustrate the point.)
Case Study 1
Simon buys an investment property, entering into the contract to purchase on 1 April 2018 with settlement set for 30 April 2018. He pays $1m for it, and his intention is to hold it as an investment property long-term. Four years later he sells the property for $3m, making a $2m gain.
In this case, the five-year bright-line period applies because the contract was entered into after the date of Royal assent. The five-year clock starts from the date of settlement (30 April 2018). Therefore, despite the property being a long-term investment, Simon is caught under the five-year bright-line rules and the gain is taxable because he sold it within four years.
Case Study 2
Margaret decides to purchase an investment property entering into a contract to purchase on 15 March 2018. The contract is conditional on LIM and finance. These conditions are subsequently confirmed and the contract declared unconditional on 25 March 2018. Settlement takes place 30 April 2018. Margaret sells the property four years later.
In this case the two-year bright-line period applies because the contract was entered into before the date of Royal assent. It does not matter that settlement occurred after that date. It should also be noted that generally a conditional contract is enough to be regarded as entry into the contract, but it does depend on the conditions. Since she has owned the property for more than two years post settlement, she does not have to pay tax.
So there are two elements at play.
• Firstly, when is the contract entered into? This determines whether you are subject to the two-year or five-year bright-line period.
• Secondly, have you sold within the bright-line period? This runs either two or five years from the date of settlement. Note that there are exceptions on this rule in that sometimes the bright-line clock starts ticking on entering into the contract rather than settlement date (e.g. off the plans purchases).
Bear in mind that the bright-line rules apply to residential property and there are exemptions, including the family home. Determining whether the bright-line test applies to your situation (and therefore whether you have to pay tax) can be confusing - talk to us if you are not sure – it's important to get this right.
Case Study 1
Simon buys an investment property, entering into the contract to purchase on 1 April 2018 with settlement set for 30 April 2018. He pays $1m for it, and his intention is to hold it as an investment property long-term. Four years later he sells the property for $3m, making a $2m gain.
In this case, the five-year bright-line period applies because the contract was entered into after the date of Royal assent. The five-year clock starts from the date of settlement (30 April 2018). Therefore, despite the property being a long-term investment, Simon is caught under the five-year bright-line rules and the gain is taxable because he sold it within four years.
Case Study 2
Margaret decides to purchase an investment property entering into a contract to purchase on 15 March 2018. The contract is conditional on LIM and finance. These conditions are subsequently confirmed and the contract declared unconditional on 25 March 2018. Settlement takes place 30 April 2018. Margaret sells the property four years later.
In this case the two-year bright-line period applies because the contract was entered into before the date of Royal assent. It does not matter that settlement occurred after that date. It should also be noted that generally a conditional contract is enough to be regarded as entry into the contract, but it does depend on the conditions. Since she has owned the property for more than two years post settlement, she does not have to pay tax.
So there are two elements at play.
• Firstly, when is the contract entered into? This determines whether you are subject to the two-year or five-year bright-line period.
• Secondly, have you sold within the bright-line period? This runs either two or five years from the date of settlement. Note that there are exceptions on this rule in that sometimes the bright-line clock starts ticking on entering into the contract rather than settlement date (e.g. off the plans purchases).
Bear in mind that the bright-line rules apply to residential property and there are exemptions, including the family home. Determining whether the bright-line test applies to your situation (and therefore whether you have to pay tax) can be confusing - talk to us if you are not sure – it's important to get this right.
Matthew Gilligan
Director
© Gilligan Rowe & Associates LP
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Disclaimer: This article is intended to provide only a summary of the issues associated with the topics covered. It does not purport to be comprehensive nor to provide specific advice. No person should act in reliance on any statement contained within this article without first obtaining specific professional advice. If you require any further information or advice on any matter covered within this article, please contact the author.
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