Changes to the bright-line test are not new; the rules have been frequently modified since their inception. However, unlike previous changes, this particular change is unique in that it has retrospective impact, provided the property sale meets specific criteria.
The new two-year rule will only apply to disposals with a ‘bright-line end date’ on or after 1 July 2024. This requirement has caused some confusion because it departs from the usual understanding of a disposal.
For most transactions, the ‘bright-line end date’ will be the date of entry into an agreement for the disposal of the property. Exceptions include instances where land is gifted, compulsorily acquired, or subject to a mortgagee sale. Therefore, it is crucial to understand that the rule applies not based on the settlement date, but on the date of entering into the sale contract, which must occur on or after 1 July 2024.
An ‘agreement for the disposal’ refers to a legally binding contract between parties to transfer ownership of a property. In the context of the bright-line test for residential property transactions, this term is crucial for determining the applicable tax rules based on the timing of the property sale.
The concept of an ‘agreement for disposal’ has been part of the rules since their introduction, designed to prevent vendors from structuring transactions to avoid the bright-line period.
The original bright-line commentary in 2015 provides guidance: Initially. the rules were applied to any interest acquired before 1 October 2015, focusing on whether a binding contract was in place before that date. A binding contract included a contract that had conditions such as finance, a LIM report or solicitor approval. It did not typically extend as far as to a contract subject to due diligence.
Although nothing is explicit in drafting the current legislation, it does refer to an ‘agreement for sale’. Therefore, merely listing your property for sale before 1 July is not sufficient to capture the bright-line end date.
Care must be taken if you list your property for sale before July and you find a purchaser, it is possible that any purchase agreement whether oral or otherwise (such as an agreement to agree) is sufficient to be the bright-line end date and therefore you could be caught within the current 5-year or 10-year rules (depending on when the property was acquired). For example:
A seller and buyer sign a contract on 30 June, subject to the buyer securing a mortgage. This agreement is considered an ‘agreement for the disposal’ as of 30 June for the bright-line test purposes, even if the condition is satisfied later.
An example of an ‘agreement to agree’ is when a seller and buyer orally agree on 1 July to finalise the sale terms by signing a contract later. Depending on the jurisdictional law, this might be considered an ‘agreement for the disposal’ if it’s binding, thus falling under the new two-year bright-line rule.
The IRD has actively enforced the bright-line test and adopted a policy to ensure the team was trained and resourced to:
Search available information publicly
Track property sales
Approach vendors and suggest that they should be disclosing the sale.
You might find that a similar approach is adopted around this time.
To successfully navigate the sale of your property under the new bright-line rule changes, it is crucial to understand the timing and legal aspects of entering into a binding sale agreement. Consulting with tax experts and careful planning can help you maximise benefits and ensure compliance with the updated tax regulations.
Reach out to your local Findex Tax Advisor today.
The views and opinions expressed in this article are those of the author/s and do not necessarily reflect the thought or position of Findex.
This document contains general information and is also not intended to constitute legal or taxation advice. If you need legal or taxation advice, we recommend you speak to a qualified adviser.
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04 June 2024
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