The original Bright-line test was introduced with effect from 1 October 2015 and was designed by Inland Revenue as a simple way to capture tax on property speculation.  The intention test had proven to be almost impossible for Inland Revenue to apply with speculators buying and selling houses in an ever-rising property market with some making impressive profits from doing so.

The design of the test was initially on this basis: if a residential property was bought and sold within two years and didn’t fit the criteria for one of the few exemptions, it was subject to tax. Though this had some “complications” in terms of the legislation, by comparison it would never be so simple. 

In the years that followed the Government of the day determined that using the tax system to drive certain economic behaviours would be the answer to what was perceived as unfairness in the area of home ownership. Cue the extension of the Bright-line to 5 years, along with some relief measures.  When this still wasn’t having the desired impact a further extension to 10 years, with even further complication as a result ensued.  What began as a simple test was pushed to such complexity, in the interest of remaining fair, that it became a whole area of expertise all on its own. The fact that the ‘Special report on interest limitation and additional bright-line rules’ ran to a whopping 216 technical pages of explanation, examples and interpretation should say it all. 

So come 1st July 2024, not quite 9 years since originally introduced, we have now come full circle. And thankfully for most tax payers we can now throw out the 216 page special report as the test has returned to almost as introduced originally.

If you sell a property on or after 1 July 2024 the bright-line property rule will only apply if the property is sold within 2 years of purchasing it.

However, if you sell a property before 1 July 2024 the current bright-line rules still apply.

The important point to note is that the end date for the Bright-line Test is the date that you enter into a sale and purchase agreement. Therefore, if you wish to apply the new two year test the agreement must be on or after 1 July 2024.

There are some other taxpayer friendly changes coming. In terms of the main home exemption this will return to the much simpler 50% rule.

For the exemption to apply you must:

• use more than 50% of the property’s area as your main home
• use the property as your main home for more than 50% of the time you owned it.

A further win is that if you build on the land, you will now not have to include the construction period when determining if your usage of the property qualifies for the main home exclusion.  This will greatly reduce the number of taxpayers that were inadvertently caught in the bright-line test previously due to a change in circumstances.

The other major simplification, and extension, is the rollover relief rules will be extended to be based on the associated person rules rather than the complicated regime we have now.  Though welcomed at the time they were not simple to apply and applied in relatively limited situations.  The following situations will now receive rollover relief under the new rules:

• associated companies, or a person and an associated company
• relatives (within 2 degrees of relationship)
• trusts and settlors, beneficiaries, and related trusts
• a partner and a partnership
• a look-through company and an owner of that company.

These new rules will be limited to situations where the transferor and the transferee are associated for 2 years before the transfer. You will also only be able to claim rollover relief once in any 2-year period.

So hopefully this will be the last time I need to write an update on the Bright-line test. The tax system works best when left to Inland Revenue policy officials in consultation with the advisor community, rather than being the political plaything for politicians with a particular ideologically-driven view of the world.

As always, if you have any questions on how the legislation, new or old may affect you please get in contact with your usual CooperAitken point of contact.        

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