Bright-Line Test Set to Change from 2 to 5 Years

Tom Willis, Amin Osama

March 2018. . . In 2015 the then National Government introduced the “Bright-Line Test” for the sale of residential property.

Under current law (subject to a few exceptions) the Bright-Line Test requires income tax to be paid on any gains from residential property sales that are disposed of within two years of acquisition.

In early February 2018 the new Labour Government confirmed its intention that the Bright-Line Test will be extended from 2 to 5 years. This proposed change is currently making its way through Parliament. Early indications suggest that the extension on the Bright-Line test would only apply to residential properties purchased after the date on which the bill is passed (anticipated to be March 2018).

The Bright-Line Test was introduced to support the IRD’s long standing “Intention Test”. The purpose of the Intention Test has always been to determine taxability based on a purchaser’s original intention at the time they acquired the property that they have since sold. However the Intention Test has been considered time consuming, overly subjective and difficult to enforce. In contrast (and beware) the Bright-Line Test is clear and unambiguous. The purpose or intent for buying the land is irrelevant. Quite simply, if you sell a residential property for a gain within two years of purchase (subject to just a few exceptions) you will have to pay tax.


Commentators have expressed concerns about the proposed change from 2 to 5 years. A common theme is that the proposed changes have the potential to have unintended consequences if the circumstances of owners changed. Ordinary Kiwi’s who are not property speculators, but are fortunate enough to own a crib/batch or a rental for less than 5 years will be taxed as if they are speculators. Circumstances outside of property owners control such as poor health, financial stress or simply changing where you would like to reside or where you prefer your batch to be could be caught.



Residential land is deemed to be:


The exemptions:

The Bright-Line Test does not apply to:

Time frames

For a standard purchase of residential land, the start of the Bright-Line Test period (the date of acquisition) usually begins from the date that the transfer of the land is registered with Land Information New Zealand (i.e. the day you completed settlement). However different rules apply for different types of purchases (e.g. buying residential land ‘off the plan’ or purchasing an unfinished apartment building).

The date of disposal is the date that a Sale and Purchase Agreement has been entered into. This means to avoid any tax liability under the current rules you would not be able to enter into a contract to sell the land until at least 2 years plus one day after the date you took a transfer of the land. Please note this would not exclude you from any potential tax liability under the Intention Test.


If the property is owned by a Trust, the rules become more complex. Properties held in Trusts may be eligible for the main home exemption (see above). However, these properties and the Trust must meet certain requirements to prevent people taking advantage of this rule for multiple properties.

Residential land withholding tax (RLWT)

To enable the Bright-Line Test to be as effective a possible the IRD has also introduced RLWT. In situations where the seller is an “offshore person” then the seller’s solicitor is required to withhold the RLWT on settlement. An “offshore person” includes a NZ citizen who has not been in NZ in the three years immediately prior to the sale.

Beware-the Bright-Line Test has been designed and intended to make it easier for the IRD to ensure that residential property investors pay tax on residential land brought and sold within the relevant period.

The requirement that the dwelling is the main home of the owner is intended to ensure that the main home exemption can only be used for one property at a time. This is determined by the degree of use and the personal connection of the property.

The critical thing is to be aware of the existence of the Bright-Line Test so as to avoid any nasty surprises. If you have any concerns about the Bright-Line Test we strongly recommend that you call us to discuss (in conjunction with taking specialist tax advice) before entering into any Agreement for Sale and Purchase of residential land.