Extension of Residential Land Bright-line Rule
The bright-line period for the residential land bright-line test has been extended from two years to five years. The bright-line test taxes a sale of residential land when the sale occurs within the bright-line period. Before this change, the bright-line period was the two-year period beginning on the date the title to property was registered in a person’s name. Following the change, the bright-line period is the five-year period beginning on the date the title to property was registered in a person’s name. If a person enters an agreement to sell residential land within the bright-line period, that sale will be taxable under the bright-line test, unless an exclusion applies.
The key date for this change is 29 March 2018. Residential land acquired on or after 29 March 2018 is now subject to a five year bright-line period. Land is considered acquired when a person enters into an unconditional agreement to buy it. A person that entered an unconditional agreement to buy residential land before 29 March 2018, even if settlement is after that date, is still subject to the two year bright-line period.
The exclusions from the bright-line test for a person’s main home, inherited land, and transfers under a relationship property agreement are unaltered. There are no new exclusions despite the greater potential for unintended disposals, for example compulsory acquisitions, sale due to financial hardship, and mortgagee sales, to occur in a five-year period.
It is important to remember residential land is not only land with a dwelling on it, but land for which there is a contract to build a dwelling, or land with a residential use zoning. The bright-line rule can also apply to the sale of shares in a residential land rich company.
Importantly, there is no exclusion for transfers to associated persons. For example, if you sell a residential property from your own name to your trust or a look-through company, the five-year bright-line period will start again.
If you are considering selling a residential property, especially property a trust owns or that is not your main home, or are looking at transferring shares in a company that owns residential land, contact your Findex adviser to discuss how this rule may affect you.