How Kiwi property owners are getting caught out by the brightline rule

Craig Macalister
6 March 2023
5 min read

6 March 2023

The brightline rule, introduced in 2015, is a good example of well-meaning policy made with intent to target certain behaviour that, when enacted, ends up capturing things that should not be caught. In this case - the sale of property that was intended as a main home.

When the brightline rules were enacted, then Revenue Minister, the Hon Todd McClay, stated in a press release dated 13 November 2015, that “the passing of the brightline legislation in Parliament today is an important tool to ensure property speculators pay their fair share of tax.”

Mr McClay also said that the “proposals in the Taxation (Brightline Test for Residential Land) Bill were part of a three-pronged approach announced by the Government in May to tighten the property investment rules.” He went on to say, “the exceptions are an owner’s main home, inherited property, and the transfer of relationship property.”

The intent behind the brightline rule

Based on the Minister of Revenue’s statements, it’s clear the intent of the brightline rule was to capture people speculating in land. That is, people buying and selling land. And many people would agree these types of transactions should be caught.

Even though the existing law would have captured transactions in which land was bought with the intent to sell, this test was not well understood by the public. The two-year brightline test was much more objective, making it easier to apply and administer for Inland Revenue. However, because of its arbitrary nature, it lacks precision and can capture transactions that are not undertaken by property speculators.

The bright-line rules and main home exclusion

Many property owners are getting caught out by the application of the brightline property rule and the main home exclusion. This includes people who have purchased land or a home with an intention to build a home on the land, or to reside in the home, but a change in circumstances has forced them to change plans. And, if the land or home acquired must be sold as well, they’re also being saddled with an accompanying tax bill. Here are some recent examples we have advised on.

Example 1:

A couple bought a block of land with the intention of building a home on the land. They obtained plans and consent, then COVID-19 hit and delayed their building progress. A few months later, one of the couple lost their job and the change in circumstances forced them to move and sell the land they had purchased.

They sold the section in the same state it was in when purchased but, because the land was not a main home under the brightline rule, due to there being no dwelling on the property, the proceeds were subsequently taxed.

Example 2:

A couple bought a home and lived in it for four months, before moving out of the property due to tragic circumstances. They allowed a family friend to occupy the property for six months before deciding to sell.

As the delay between them moving out and selling was slightly longer than the period they had occupied the property, the main home exclusion did not apply under the brightline rules.

Example 3:

A couple bought a property and lived in it for a period of several months. However, after one of them lost their job, they decided to move from the area to find alternative employment. They wanted to keep the family together so, instead of relocating during the week and coming home on the weekends, they decide to sell.

The house was listed for sale but took longer than anticipated to sell. Again, the gain on sale was subject to tax as the main home exemption did not apply.

Each of these examples show how easy it is for well-meaning property owners to buy replacement properties with the intention of having a home for themselves and their families. They were not property speculators and did not acquire the properties for a purpose or intent of sale. Each time the property was purchased to be their main home and each time, they were forced to pay tax on the sale because of the brightline rule.

Where to from here

While the brightline rules were enacted with the best of intentions to better capture property speculators, their arbitrary and poorly targeted nature combined with the design of the main home exception, mean that the rules are unfairly catching out everyday property owners with no intent to profit from a land sale.

Inland Revenue is very good at correcting law when the draught-person’s pen leaves a crack that allows situations that were intended to be taxed to slip through. Extending the same zeal to alter the outcomes of the law when it is unintended shouldn’t be outside its reach.

If you are buying or selling property and have concerns around the brightline rule, get in touch  with our  tax consulting team for assistance.

Author: Craig Macalister | Partner