Taxing property gains: the proposed 'bright line' test


August 18 2015


In May the government announced proposed changes to the tax rules for New Zealand and non-resident investors who buy residential property with the intention of selling the property and making a gain. The proposed ‘bright line’ test will require income tax to be paid on any gains and will be taxed at the seller’s normal income tax rate. It’s proposed that this rule will take effect from 1 October 2015.

The purpose of these proposed changes is to supplement New Zealand’s already existing tax laws. Currently, anyone who buys a property with the intention of on-selling the property for gain is liable to pay tax on that gain. However, enforcement under the current law doesn’t appear to be across the board. The government’s intention is that the tax changes will affect New Zealand and non-resident investors equally.

When you’re signing an Agreement for Sale and Purchase, it’s proposed that you must provide an IRD number as part of the transaction. Non-residents will need to have a New Zealand bank account in order to obtain an IRD number.

Under the proposed changes, there will be a tax on any gain from the sale of a residential property if you have owned the property for less than two years. It’s important to note that gains made on the sale of a property held for more than two years will still remain subject to income tax if the property was acquired with the ‘intention’ of on-selling the property for gain.

Under the proposed changes, there will be a few limited exceptions to the ‘bright line’ test. Vendors will not be taxed on gains if:

  1. The property is their main home
  2. It’s inherited from a deceased estate, or
  3. The property is being sold as part of the relationship property agreement, such as a separation.

Exceptions may also apply to transfers between associated parties (from an individual to their family trust, for example). More details on the exceptions are expected to be released in due course. If you are buying or selling a property it’s essential you fully understand the nature and effect of these proposed changes – and don’t hesitate to talk with us about the implications for your personal situation.


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