Breaking down the bright line test: What does it mean?

If you hadn't already guessed it by now, the government is taking residential property investment in Auckland seriously. The fallout of the the latest budget has been wide-reaching, and investors in particular have been in the government's sights – or, at least, speculative investors. The Inland Revenue Department (IRD) has come up with a proposal to slap a tax on those who sell their investment property within two years, otherwise know as the bright line test. 

So what does this change have in store? The IRD has set the wheels in motion and has released the nitty-gritty details of what the bright line test will entail once it's put into action. It's also seeking feedback on the measure before the test becomes law from October 1, so if you're feeling vocal about the change, it could be a good time to have your voice heard before July 24.

What does the bright line test involve?

Basically, any gains made on the sale of residential property that's bought and sold within two years (apart from the main family home) will be hit with income tax. In fact, even if someone has been living in their investment home, but has been collecting income from it, they'll still need to pay the tax,

The new bright line test will apply from October 1.The new bright line test will apply from October 1.

This is quite a big departure from what has been the case in the past, and even though the government isn't quite calling it a capital gains tax, I think we can take the leap and says its almost one in the same – at least for these kinds of investment properties. 

Revenue Minister Todd McClay pointed out the bright line test is all about intention. Under the old laws it used to be a very subjective thing, but this removes that nugget of doubt with an objective test.

It draws a clear line between all investors and overseas buyers who are selling for speculative reasons, and people who did not buy the home for resale (or someone who needs to sell their home for another reason).

"This consultation paper is an important step in the Government's plans to bolster the tax rules on property transactions and help Inland Revenue to enforce them," Mr McClay said. 

Clearing up the land problem

It's not just residential investment properties that are being snapped up – land is also being sold at a rate of knots. The government decided to apply the bright line test to residential land sales as well, but there were some questions about what this means exactly.

For example, what about mixed-use land? Will this still come under the law? The IRD initially thought council zoning could be the way to go, but they're a fickle bunch and can easily change their plans. 

In the end, they settled on land that has a home on it already or where a residential property is going to be built – and this excludes farmland and areas for business use, too. 

Sounds like a lot to take in, right? Here at Goodlife, we know that residential property investment isn't a flash in the pan scenario. We can help you understand all the laws and regulations around buying a home in New Zealand, as well as offer property investment advice to support your journey. 

Here's to your financial independence!

Daniel Carney
Authorised Financial Adviser / Investment Property Expert

Contact us now!

0508 GOODLIFE
info@goodlifeadvice.co.nz