In reaction to a heated property market, last year the Government introduced new legislation referred to as the Brightline test, which took effect from 1 October 2015.
The Government believed at the time that this new measure would help to take some heat out of the market, particularly with foreign buyers.
The new legislation provides that where a residential property is purchased on or after 1 October 2015, and is sold within 2 years of acquisition (the Brightline period), any gain on sale is taxable.
There are two main exemptions from this legislation. The first relates to a person’s main home, which may in some circumstances include a home owned by a trust. The second relates to property acquired by inheritance.
As with any legislation, there is obviously more complexity to this and many taxpayers are still trying to get their heads around certain aspects of this legislation, as it applies to their circumstances.
One such case that has recently arisen involves a trust that owned a residential house that was rented to third parties. The house had been owned for many years by the trust and a long time before 1 October 2015 when the new legislation took effect.
Many people who have a trust that owns property will know that for the purpose of the Land Transfer Act the property is registered in the name of the trustees.
In this particular case, the trust was looking to replace one of the trustees. As a result, the property title would have needed to be updated with Land Information New Zealand to show the new trustee on the property title.
On review of the Brightline legislation, it appeared this would result in the 2 year Brightline test period commencing from the date of registration of the new trustee. This is irrespective of the fact the property had been owned by the trust long before the Brightline legislation was introduced.
As the property was rented by the trustees to third parties, neither of the exemptions apply. Accordingly, if the property was to be sold within 2 years from the date the title for the property was amended to change the trustee, a gain on sale would be taxable.
We have spoken to Inland Revenue Policy Advice who have agreed that based on the current wording in the Income Tax Act, this would be the outcome. They have however advised this was not an intended outcome of the legislation and therefore they will look to rectify this issue in a future remedial amendment. Any such legislation is not likely to be seen until early 2017 however Policy Advice indicated it is likely the legislation would be retrospective to the date the Brightline test became effective. This is little comfort to anyone that is changing trustee in the meantime.
Given the volume of new tax legislation the Inland Revenue has been tasked to implement in recent years, unfortunately these practical issues are likely to continue to arise in the future.
Please contact the Hayes Knight tax team if you would like assistance with your property transactions.
T +64 9 414 5444
Shelley-ann Brinkley Associate – Tax Consulting
T +64 9 414 5444