Accounting and Tax

More Bright-line rule changes pending for residential property sales

Daniel Gibbons Daniel Gibbons
29 February 2024
6 min read

Owners of residential property would have been heartened with the announcement that the Government was changing the bright-line rule for residential property sales, back to a two-year test. This is a meaningful change given the current bright-line period is 10 years, unless considered a new build, which has a five-year time.

However, until legislation is passed the current rules still apply, leaving residential property sellers and buyers in a limbo.

Residential property owners and buyers also need to keep in mind that the final legislative details regarding the bright-line rule changes will be critical as to how these rules will apply.

The current bright line rule status

We know that the 2-year bright-line period was agreed in the coalition deals made last year. Further to this, in the December mini-Budget it was confirmed the change to the bright-line rule is coming. These changes would be included in the current taxation Bill that should be approved before the end of March.

However, the current rules are not that simple, especially with all the continued changes to these rules over the years. There are some nuances in how the mechanics of the change will occur, plus some additional decisions that need to be made. Such as:

  • When the rules will apply from and to whom – i.e. will they have retrospective application or just be prospective (which is how previous changes were broadly made)?

  • Will the main home exception be the same as the current iteration or will there be a change back to the original version? (there are pros and cons with both approaches)

  • Will the recently introduced roll-over rules remain? These were a welcome addition as they allowed changes in certain associated ownership without re-setting the bright-line period.

These questions leave the market with some uncertainty as to what to do in the interim.

Residential property owners – what happens if you sell now?

The key question right now for property owners is whether they should sell their property now, or should they hold off for final legislation before deciding?

It is expected that sales from 1 July 2024 should be subject to a two year bright-line period, not the existing 10-year or 5-year period. This is coupled with a statement that sales from property purchased before 1 July 2022 should also not be subject to tax as more than two years would have expired (assuming a sale from 1 July 2024).

This suggests that this bright-line test will have an element of retrospective application. So, provided a sale occurs on or after 1 July 2024, a 2-year bright-line period should apply irrespective of whether that property was purchased during the five or 10-year bright-line periods.

However, this also suggests that if a property is sold before 1 July 2024, it would remain subject to the current rules. This will be a key consideration when legislation is released.

Therefore, the recommendation for residential property owners that could be caught by either the 5 or 10-year bright-line rules is to wait for final legislation before proceeding with a sale. But this of course is just one consideration when deciding to sell.

Residential property buyers – what happens if you buy now?

If you were to purchase residential land today, that purchase would be subject to the 10-year bright-line period (unless a new build) under current legislation. While changes are expected, there is still a risk that final legislation will not apply retrospectively (which is how previous changes of this nature have been applied).

However, as noted above, the language used by the Government suggests that even if a property were acquired today, the property could be subject to a two-year period in the future. So, it is possible that a purchase today may still benefit from a future 2-year bright-line period.

Therefore, one factor that residential buyers will need to weigh up is the risk that they could still be subject to current rules, with a chance they may still benefit from the pending changes. So, it is recommended to move with caution until final details emerge. Although again, such a decision is not limited just to what bright-line rule might apply and the broader factors of buying property should be considered.

Buying or selling, what can you do now?

In all cases, we recommend that you consult with your advisor, keeping in mind that the bright-line rule is not the only tax rule that can apply to the sale of land. Further, there are nuances that sometimes mean the outcome is not always as expected, especially with the main home exemption. Therefore, you should always be aware of your obligations in advance.

Working with a tax specialist means you can be confident that the decision you make, whether to buy/sell now or wait, is the right one for you. Contact our team of Tax Advisors to start the conversation.

Findex, trading as Findex Group Limited

This article 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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Daniel Gibbons
Author: Daniel Gibbons | Partner