Inland Revenue is in the process of contacting taxpayers who they believe will be subject to the new bright-line test as a result of selling properties in New Zealand that were purchased after 1 October 2015.
New Zealand has what is effectively a tax free capital gain regime in that the profit on the sale of properties (deducting the purchase price from the selling price) will generally be free of tax.
There are some exemptions such as in the case of properties acquired by property dealers and those who purchased the property with the intention of selling it at a profit.
But for most property owners in New Zealand who purchase a property to either live in or rent out, you can usually safely assume the profit on the sale of the property won’t be subject to income tax under the bright-line test. For that reason profits made on the sale of properties have generally been tax-free as capital gains.
The bright-line test was introduced to provide Inland Revenue with some certainty on when there was an “intention to sell” at a profit when someone purchased a property.
The initial test related to properties purchased between 1 October 2015 and 29 March 2018.
If these properties were sold within 2 years of acquisition, and they were not lived in for at least 50% of the time, then chances are they were going to be caught under the bright-line rule which made the profits subject to income tax. The presumption was that a sale of the property within 2 years of acquisition meant there was an intention to do just that.
On 29 March 2018 the time required to hold the property prior to sale was extended to 5 years. That meant if a property was purchased after 29 March 2018, sold within 5 years and not actually lived in by the property owner, then the profits on the sale will probably be subject to income tax.
There are still a number of exemptions. One of the primary exemptions relates to the property owner living at the property. The test is far more stringent than Australia’s capital gains tax requirements and you should be careful not to confuse the 2 regimes.
Living at the property means just that. It does not mean only having one property in New Zealand, or letting friends and family stay in the property for no rent. It basically means that if you are living in Australia and you could not have been living at the property in New Zealand.
Inland Revenue now has exceptional reporting lines from New Zealand’s land transfer office and all property sales and notified to Inland Revenue. They have a pretty good idea if you are living in New Zealand or not a result of your tax records.
If you have an Australian address, are not earning New Zealand-sourced income or have not been filing an income tax return in New Zealand, it is very easy for them to arrive at the conclusion that the sale of your property in New Zealand is likely to be subject to the bright-line test.
If you are living in Australia then Inland Revenue will be presuming that your property has not been lived in by you and will therefore be subject to the bright-line test. It may also come to their attention that your property may well have been rented out so you should ensure you have been filing income tax returns for those periods.
If this is news to you and that you thought you wouldn’t have to be filing in New Zealand then contact us so we can bring your income tax affairs up-to-date and perhaps even get a remission of the late filing penalties.
One day it is likely you will sell that property and on that day Inland Revenue will become aware of the property sale.
There are other exemptions including if you inherited the property or disposed of it under a relationship property agreement.
If you have been contacted by Inland Revenue, you have recently sold your property or are considering selling it, we suggest you contact us to identify any income tax issues that you may have to factor into a sale.
The information in this article is indicative of NZ tax rules and changes and not intended to be complete for all intents or purposes and does not constitute advice. It is recommended that you obtain professional advice, suited to your particular circumstances, from us before acting on anything you read.