Background

The National party led New Zealand government has recently announced significant changes to the bright-line test (capital gains tax regime) for residential property sales. This is aimed at cooling the housing market and undoing the changes the previous Labour government enacted during their terms of government. Here is what we know so far.

Summary of the Bright-Line Test

Original Bright-line Period: The original bright-line test was introduced on 1 October 2015 creating a capital gains tax for properties bought and sold within two years of acquisition.  

First Extended Bright-line Period: From 29 March 2018 to 26 March 2021, the bright line test was then extended to properties sold within 5 years.

Second Extended Bright-line Period: The bright-line period was extended again from 5 years to 10 years for properties acquired on or after 27 March 2021.

New Build Exemption: Properties classified as "new builds" were given a shorter period of 5-years, even if acquired on or after 27 March 2021. A new build is generally defined as a self-contained residence added to land and has received a Code Compliance Certificate (CCC) on or after 27 March 2020.

Main Home Exclusion: Generally, the bright-line test does not apply to a sale of property if it is your main home.  Complications can arise for trusts or people who have more than one main home.

Latest Proposed Change (Effective 1 July 2024)

The National Government announced that they would bring the Bright-line period back down to two years from 1 July 2024.  It is unclear whether the triggering points would be entering into a contract or settlement.  The latest announcement on 14 March 2024 indicates that the Government will likely make the triggering point entering into a binding contract after 1 July 2024 (not settlement).

Generally, IRD has defined the point of “acquiring” a property as the date there of a binding agreement for sale and purchase.  Furthermore, the bright-line period start, and end date have generally been from the date of settlement date to the date of entering into a binding agreement to sell.  However, we will have to see the proposed Bills to understand how the Government will define the period applicable from 1 July 2024.

In any case, this will be a significant reduction from the current 10-year period and is intended to ease pressures on the housing market.  The National Government is also proposing to restore the ability to claim interest deductions for residential investment properties which will be eased back in over time. This will likely encourage more short-term investments into the property market and may stimulate the market. However, in a difficult market where interest rates are at approximately 7%, the return on investment would have to outweigh the costs to warrant the commercial decision for an investor to purchase residential property.  There appears to be speculative investors waiting for clarification but only time will tell.

Disclaimer:
We have taken care to ensure that the information given is accurate, however it is intended for general guidance only and it should not be relied upon in individual cases. Professional advice should always be sought before any decision or action is taken.