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New “bright-line” test for sales of residential land

October 02, 2015


Partners Barney Cumberland
Special Advisors Stuart Hutchinson
Senior Associates Nick Bland, Paul Windeatt

Residential land tax

A new "bright-line" test is being introduced that will impose income tax on any gain from residential land purchased and sold (or otherwise transferred) within two years, unless an exception applies.

The new rule will apply from 1 October. However, it will not technically become law until sometime after 22 October, being the date by which the Select Committee considering the draft legislation (and submissions on the legislation) must report back to Parliament. Our discussion below is based on the draft of the Bill that is with the Select Committee, so there could yet be some change to the details of the test.

Key exceptions

The bright-line test will apply to the transfer of residential land, with exceptions for:

  • The main home, being the property used predominantly, for most of the time that the seller has owned the property, as their main home.
  • Transfer following death to an executor, administrator or beneficiary, and subsequent disposal by those persons.
  • Transfer under a relationship property agreement (where a relationship breaks down). The bright-line test may apply to a subsequent disposal within two years of the transfer.

What is residential land?

Unlike the property information tax measures which also take effect from 1 October (discussed in our previous Tax FYI), the bright-line test will not apply to non-residential land.

The Bill’s proposed definition of residential land is land that has a dwelling on it, land where there is a plan or understanding to build a dwelling on it and bare land that by its area and nature is capable of having a dwelling erected on it. IRD says the latter will include bare land zoned as residential.

Land used predominantly as business premises or farmland (including forestry, horticultural and pastoral businesses) will not be residential land.

Two year bright-line period

The two year period for the bright-line test will span the date of acquisition of the property to the date of disposal. In practice, due to different tests applying for the date of acquisition and the date of disposal, the bright-line period could be regarded (from a layperson’s viewpoint) as spanning more than two years.

The date of acquisition will generally be the date of registration of transfer of the land. By contrast, the date of disposal will generally be the date that the seller enters into an agreement for the sale of the property (ie a conditional agreement that is subsequently settled), not the later date that the disposal is registered.

This means that the date of disposal for the seller (eg conditional agreement to sell) will be earlier than the date of acquisition of the same property by the buyer (registration of transfer). This is deliberate, to prevent the bright-line test being thwarted by sellers, merely by extending the settlement date.

Special acquisition and disposal dates are proposed in some situations. For example, when buying "off the plan", the acquisition date will occur on entry into the contract to purchase, while subdivided land will be deemed to be acquired on the original date of registration of transfer for the undivided land. The disposal date for land disposed of by gift will be the date of registration of transfer.

Transitional measure

Although the acquisition date will generally be the date of registration of transfer, as a transitional measure the bright-line test will only apply to land for which an agreement for sale and purchase is entered into on or after 1 October 2015. For acquisitions other than by sale and purchase, the bright-line test will apply if registration of title occurs on or after 1 October.

Multiple main home sales within two years

The main home exception will not apply to a sale if, within the two years immediately preceding the date of disposal, that exception has applied to two or more other sales by the same seller.


Unlike the new property tax information rules, residential land owned by a trust can qualify for the main home exception, but only if both:

  • The trust-owned property is the main home for a beneficiary of the trust; and
  • The principal settlor of the trust does not personally own a main home (the principal settlor being the person who has settled the most property, by value, on the trust).

In addition, if the principal settlor is a beneficiary of the trust and the trust owns the property that is the settlor’s main home, the main home exception applies only if it is that dwelling which the trust is selling, not another dwelling owned by the trust in which another beneficiary resides.

Involuntary disposals

The bright-line test will apply even where a disposal occurs involuntarily in the bright-line period, due to compulsory acquisition (eg under the Public Works Act) or mortgagee sale. Even in Auckland’s rampant property market, it may be unusual for this to result in a taxable gain being made by the debtor on a mortgagee sale of residential land that had been bought as an investment.

Gains and losses

In determining the extent of any gain or loss, ordinary tax rules will apply. The person disposing of the property, whether by sale, gift or otherwise, will be deemed to derive market value, where the transfer occurs for less than market value.

Costs of disposal and acquisition, such as conveyancing costs and real estate commissions will be deductible in determining the net gain or loss, as will costs of improvements to the property.

If a loss, rather than a gain, occurs on a disposal of residential land to which the bright-line test applies, the loss will be recognised for tax purposes. However, losses will be ring-fenced and only able to be offset against taxable income from other land sales under either the bright-line test or any other tax rule regarding land sales in sections CB 6 to CB 15 of the Income Tax Act.

No loss will be recognised on a sale to an associated person, due to concerns that losses will be engineered.

Land-rich companies and trusts

Anti-avoidance measures are proposed to prevent land-rich companies and trusts being used to circumvent the bright-line test. A land-rich company or trust will be one where at least 50% of the value of the company or trust is attributable to residential land. Where 50% of the shares in the company are transferred in a 12 month period or changes are made to the trust deed or to a decision-maker of the trust, with a purpose or effect of defeating the intent and application of the bright-line test, then a disposal of residential land will be deemed to have occurred.

Residential land withholding tax (RLWT)

In order for the bright-line test to be maximally effective, IRD has proposed introducing a RLWT that would apply (from July 2016) where the land sold is in NZ and the seller is an offshore person (which will include a NZ citizen who has not been in NZ in the three years immediately prior to the sale).

The conveyancer or solicitor involved in the sale would be required to withhold the RLWT, being the lower of:

  • If determinable, 33% of the seller’s gain on sale (being sale price less acquisition price, with date of and cost of acquisition to be ascertained from a certified copy of the agreement by which the property was acquired); and
  • 10% of the purchase price.

The RLWT would not be a final tax and a tax refund could be claimed if the amount of income tax charged on the actual gain was less than the amount of RLWT.

The RLWT proposal is not included in the Bill introducing the bright-line test, but has been raised by IRD in an Issues Paper on which it has invited submissions by 2 October. If, as expected, the proposal proceeds, draft legislation will follow at a future date.

A wider tax net

Finally, a word of caution. The bright-line test is intended to make it easier for IRD to ensure speculators pay tax on residential land bought and sold within two years, even though other tax rules already apply to such trading.

However, the bright-line test will bring within the tax net some sales that previously would not have been taxable otherwise. For example, residential land bought as a long-term investment (and not for use as the main home) will be taxable under the bright-line test if sold within two years of acquisition (eg due to a change of personal or financial circumstances), even though the gain would not be taxable under current rules that tax gains on property bought with a purpose or intention of resale.