IRD compliance activity in relation to bright-line test
Inland Revenue is sending letters to taxpayers who have sold land that they have owned for less than two years. The letter suggests that unless the property was the taxpayer’s main home for 50% of the time they owned it, the taxpayer may need to pay tax on the sale proceeds. The letter includes a reminder that the due date for filing income tax returns was July 7 and the potential for penalties to apply if that filing deadline was not met. Inland Revenue is sending these letters directly to taxpayers regardless of whether they have a tax agent, such as Findex, preparing their tax returns.
The reference to owning land for less than two-years is alluding to the potential application of the bright-line test to the land sale. The bright-line test taxes a sale of residential land when the sale occurs within the bright-line period and the property sold is not the person’s “main home”. Up until 29 March 2018, the bright-line period was the two-year period beginning on the date the title to property was registered in a person’s name. A recent legislative amendment extended the bright-line period to five years for residential land acquired after 28 March 2018. Therefore, if a person enters an agreement to sell residential land within two-years (or five-years if the property was acquired after 28 March 2018) of the title to the property being registered in the person’s name, the proceeds could be taxable, if the land is not the person’s main home and no other exclusion applies.
The bright-line test only applies to residential land. Inland Revenue is sending this letter to anyone that has sold land within two years of purchase regardless of the type of land involved. Taxpayers who have sold farmland and commercial buildings that are not subject to the bright-line have received this letter. Just because you have sold land within two years that is not your main home does not mean you are subject to tax. It must be residential land and no exclusion can apply.
Further, if you are a Findex client you should have the benefit of our extension of time arrangement with Inland Revenue for filing your tax return. The due date for your 2018 tax return will be 31 March 2019, not 7 July 2018.
If you receive one of these letters from Inland Revenue you should contact your Findex adviser, so we can assess whether your land sale does create a tax liability for you.