The bright-line test taxes residential land sold within the bright-line period and applies to residential land that a person first acquired an interest in on or after 1 October 2015. The period of the bright-line test increased from two years to five years for residential land that a person first acquired an interest in, on or after 29 March 2018. The bright-line test only applies to residential land. It does not apply to farmland or land a person uses as a business premises. The principal exclusion from the bright-line test is for a person’s “main home”. The other exclusions are for inherited land and when the transfer of the land is by a relationship property settlement.
The Inland Revenue Department has released two statements on the bright-line test. The first considers whether a lifestyle block is farmland and, therefore, cannot be subject to the bright-line test, and if it is not farmland, whether it can be a main home. The statement concludes that a lifestyle block will not generally be farmland as it will not be used in a farming or agricultural business carried on by the owner. Accordingly, a lifestyle block will generally be residential land to which the bright-line test may apply. It further concludes the main home exclusion will apply where more than 50% of the area of the lifestyle block has been used for the person’s main home for more than 50% of the time the person has owned it.
The second statement considers whether the main home exclusion can apply where a person subdivides a section of their residential land and sells it. The statement concludes that the main home exclusion will apply when more than 50% of the area of the land in the subdivided section has been used for a dwelling that was the person’s main home for more than 50% of the time since the seller acquired the undivided land. For example, if the subdivided section has been enjoyed as the backyard of the person’s main home it will qualify for the main home exclusion despite there being no dwelling on the section sold.
If you are selling land or thinking of selling, talk to your Crowe Horwath adviser before entering any agreement to sell, to ensure you understand how the bright-line test or other taxing provisions could apply to your proposed sale.
Technical Director – Tax Advisory