Accounting Blog

The National Government in its attempt to slow down the runaway train that is the NZ property market, introduced a quasi capital gains tax in 2015, otherwise known as the ‘Brightline Test’.

Put simply, capital gains on properties acquired on or after 1 October 2015 and sold with two years are taxable. Labour considers that 2 years is insufficient and this period needs to be 5 years to have any real impact. I’m inclined to agree. Unless you need to do a very quick buy and flip, it would seem this tax is easy to avoid.

But I am hearing stories of property owners being inadvertently caught.

A case in point involves a woman who had acquired a rental property some 20 years ago. 10 years ago she married and it was her intention that her husband acquired half of her assets, and she, half of his. The ownership of the rental property remained in the wife’s name on the basis that the husband essentially owned half of it by operation of the relation property rules. In February 2016 the couple finally got around to tidying up the ownership of their assets and together with other matrimonial assets, half of the rental property was transferred to the husband. Between February and June 2016 the property’s value sky rocketed and the couple receive an unsolicited offer which they accepted. Unfortunately the husband’s share failed the Brightline Test and his gain was subject to tax.

Another example involves a couple of bought an apartment they planned to live in off the plans. The 2 year period starts from the date the contract is entered into so the house does not even need to exist. There is an exemption from the Brightline test for the main home but this requires the property to be used predominantly as their main home. The couple received an offer to take them out of the contract and accepted it (within the 2 years). Unfortunately this couple also received the bad news from their accountant that the gain was taxable.

Other examples I am seeing where the Brightline test can be inadvertently triggered are in the case of internal restructures, such as transferring properties between closely held companies, trusts and personal ownership.

The Brightline test is a crude tax that can catch transactions not intended by Parliament. The simple lesson is avoid nasty surprises by contacting your accountant before selling any property other than your main home. Any tax can therefore be factored into the decision making process and provision made.

~ Matt Baker – Partner