New Zealand does not have a formal Capital Gain Tax system. Regarding investment tax, whether it is taxable depends on whether you hold an investment on revenue or capital account.
To cool down the property market, on 27 March 2021 New Zealand government announced a new change in the Income Tax Act 2007. It changed the five-year Brightline period to a ten-year Brightline period for residential property acquired on or after 27 March 2021.
This Brightline test only applies to residential properties which are available for long term accommodation. It does not include hotel, motel, Airbnb, Bookabach types of short-term accommodations.
Date of acquisition means entering a binding contract, e.g. when the purchase agreement is signed, it is not necessarily the property settlement date.
However, there are some exemptions to this rule:
1) New build Exemption
If you acquire a new build, you will only be subject to the five-year Brightline period and not the ten-year rule. To get the five-year rule, you must obtain it no more than 12 months after the CCC for the property is issued, and when you sell, it must have its CCC by that time.
2) Main Home Exemption
Your main home is exempt, but there were some changes to this rule. The majority test is gone, and it is now an apportionment. If you rent your main home for two years, and live in it for five years and then sell it, that is less than ten years. When you sell it, you would be paying tax on 2/7 of that gain. It would have been exempt under the old five-year Brightline rule because the house had been primarily and principally used as your residence. If it is a new build, you sell it after five years, you don't have to worry about the apportionment, but if it is not a new build you will be looking at the ten-year Brightline rule.
There is also a proposal to change the situation where the main home is also partially rented so that the main home portion is smaller than the part that you rent out. In that scenario, there will be an apportionment if you rent a bedroom out to a boarder that is going to be exempt. But if you rent the majority of your house out, then the Brightline test could apply to you.
Be careful; you could reset the Brightline period when you transfer the residential property owned pre Brightline from a Trust to an individual. An excellent example is many winding up trusts in the last couple of years because of the new Trusts Act 2019. So the holiday house down the Coromandel needs to come out from the trust and are put back in Mum and Dad's name, probably owned in the family for 30 years. No one thinks about the Brightline test. However, by selling it out of the family trust, the Brightline test restarts. If it's posted 27 March 2021, it is a 10-year Brightline period. As a result, if you sell that Bach within ten years, it will be subject to income tax on the gain in value from 27 March 2021 or whenever you transfer it after that date.
There is a proposed rollover relief that will allow people to transfer property without triggering the Brightline rule. It will have a two-part test. It means the person transferring it won't necessarily be subject to the Brightline. The person taking it over, if they are associated, will be deemed to have owned it from when the related transferor originally acquired it. Currently, it appears what they are talking about here is some transfers to and from family trusts, look through companies and partnerships. It doesn't look like it will extend to companies, but that remains to be seen. Again, these are only proposals, and while we have draft law, we will likely get some fine-tuning of this as submissions are made. Any changes will likely apply to transfers on/after 1 April 2022.
The only thing to be very careful of is that while all these other changes are already applicable post 27 March 2021, the proposal to change rollover relief will not apply until 1 April 2022. If you have a property you want to move around, maybe you still want to wind up the family trust. Whatever you do, don't move those properties before that date, or you will not benefit from the rollover relief.
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Disclaimer:
This article is of a general nature only. Please obtain specific advice on client situations as minor changes in facts may result in significantly difference outcomes. This article does not purport to cover all aspect of tax law relevant to the topics covered.
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