Auckland Accountant Raises Further Questions about the Bright-Line Test for Residential Land

Following the introduction of the Taxation (Bright-line Test for Residential Land) Bill to Parliament, questions are being raised about the detail. The Bill proposes to tax certain residential land sales within two years of acquisition.

Leicester Gouwland of Auckland chartered accounting firm William Buck Christmas Gouwland suggests there are a number of consequences that taxpayers will need to be aware of to avoid being unexpectedly caught by this proposed legislation.

Firstly they must be aware of the issue of the actual dates used by the bill. The dates chosen to represent a sale within two years, are two dates which most taxpayers will not be familiar with, and would not logically consider to be the dates they acquired or sold their residential land. 

The unfortunate result will be that a number of taxpayers who have owned residential land longer than two years will be rather unpleasantly surprised.

To explain, the acquisition date for most taxpayers will be when the title is registeredin their name. Therefore whenever considering a sale, taxpayers should check when this date is, in case there has been a delay. Solicitors handling these transactions will therefore need to ensure that there are no delays in title registration.

For most taxpayers the sale date will be the date of the sale agreement, despite the fact that the property will not have settled.

This may also have unfortunate cash flow consequences. Taxpayers will more than likely face an unexpected tax bill that may have significant IRD interest consequences. 

Take for instance a contract for sale signed on 31 March – this will trigger income tax due in the tax year ending on that date, 31 March. If the tax payable is above $2,500 or if the taxpayer is already a provisional taxpayer, the income tax payable could  have IRD interest accruing from 28 August the previous year. There is a threshold for individuals where interest does not apply, however for trusts and companies there is no threshold.

Further, there are consequences for taxpayers now forced into the provisional tax regime. In order to avoid having to pay provisional tax that is payable the following year at levels based on the higher level of taxable income, they will need to estimate their provisional tax down. However, the interest free threshold will not apply.

This is rather unfair to taxpayers caught by a one-off sale. Surely they should be allowed to pay provisional tax the following year without penalty, without allowing for the income from the residential land sale.

This tax will cause people who otherwise do not have to file an income tax return, to have to do so. This will likely necessitate hiring a chartered accountant, as the rules are relatively complex. 

Compliance costs are clearly going to increase with taxpayers needing to seek advice before selling a property, and also when preparing their income tax return.  Legal costs are likely to increase as solicitors will be required to do more work when undertaking conveyancing work, even on property not caught under the rules. This is because they will need to determine in each case whether the bright-line test and related legislation applies to transactions.

Non-compliance through ignorance of the law is likely to occur, and those caught out innocently will find themselves facing significant penalties and accounting costs, as well as needing to find the tax owing. Bear in mind that this money could have been otherwise spent or simply not be readily available.

The IRD will undoubtedly use its added resources to monitor property transactions, and queries from the IRD about transactions will occur.

A further unfortunate consequence is that family arrangements will need to be considered in more detail in the future. Roll-over relief is available for couples dividing relationship property, but the relief does not apply to a subsequent sale of property. 

So if a holiday home needs to be sold by one party to buy a family home after a relationship breakup, they will be affected by the bright-line test. Therefore couples will need to consider the tax payable when dividing assets, otherwise the party keeping the family home will be at an advantage.

Parents who own property for their children’s use (or via trusts) will not be able to claim the family home exception. In order to obtain the family home exception the property will need to be owned by the children directly. This is unnecessarily complex. It should surely be of concern to the government in circumstances where the children are disadvantaged.

A grey area exists regarding whether an amount paid is a repair or an improvement. This will apply in situations where repairs are not able to be claimed under the ordinary tax rules, for instance where the property is a holiday home. In this case the only benefit for tax purposes will be if the work is an improvement, because the cost can then be added to the acquisition price of the home, to reduce the gain made. It is often difficult to determine repairs from improvements, so this will be a further difficulty for taxpayers.

“We hope that the Government will consider refining the proposed Bill to make the effect fair and workable”, said Mr Gouwland.


For further information contact your local William Buck advisor on +64 9 366 5000 or info@williambuck.co.nz