Brightline Enforcement Initiatives; A recap on the rules

Since the introduction of the Brightline tax rules it has been compulsory to provide an IRD number when undergoing a land transaction in New Zealand.

This information has ensured IRD can identify individual taxpayers who may be liable for income tax on residential property transactions where land is sold within the Brightline period simply by cross referencing IRD numbers with land transfer records.

Recently IRD have begun contacting taxpayers they believe may have tax liabilities associated with land transactions caught by Brightline and have been inviting them to complete the IR833 Property Sale information disclosure document.

This suggests an active enforcement approach from IRD and means property investors must be across the Brightline rules and the exemptions that can apply to them.

So, in this article we recap some of the key Brightline rules.

Why was Brightline introduced?

As a political response to rising house prices that was blamed on speculation in the housing market. The original intention provisions in section CB6 were strengthened by the National government by introducing income tax on and sale of residential property not covered by an exemption that occurred within two years of acquisition.

The subsequent Labour government then increased the two year threshold to five years effective from 29 March 2018.

Interestingly, having ruled out a comprehensive Capital Gains tax, the Labour government now seems to be looking to further extend the Brightline rules out as far as ten years despite the rules having had no success in reducing the rise of residential house prices in NZ.

So, what are some of the key features of the rules?

Firstly, the rules apply to all residential land. Defined as land that has a dwelling on it or, land for which as an owner has an arrangement to erect a dwelling, or bare land that may be used for erecting a dwelling under the rules of the relevant district plan.

Residential land does not include farmland or business premises so commercial property is generally not impacted by Brightline.

The Brightline test does not apply to inherited land or land transferred pursuant to a relationship property agreement.

For the purposes of the Brightline test a person does not generally acquire land until the person is the registered owner of the land but the person disposes of land when they enter into a contract for the sale of land. Accordingly, care is needed if you are counting days as the start date for the Brightline period is measured from a different marker than the finish date.

A main home exclusion does provide an exemption to Brightline for a taxpayer's main home. To gain the exemption though a taxpayer must have lived in the home predominantly and for most of the time it has been owned as the taxpayers dwelling. If the property is held by a Trust the exclusion only applies for the main home of the principal settlor of a Trust. This has added complications for families using Trusts to hold homes for beneficiaries.

The main home exclusion can only be applied two times in two years and won't apply when the taxpayer has a regular pattern of buying and selling homes.

The Brightline rules contain special treatment for subdivided land, land where a lessee acquires and disposes of a freehold title and to land acquired "subject to title".

One of the key issues with the impact of Brightline is the restructuring of land holdings. Movements of land between associated parties and entities is not exempt from Brightline so a restructure can trigger or re-set Brightline. Great care is therefore needed when contemplating restructures and Trust resettlements.

Brightline can also apply to residential land held overseas by NZ resident taxpayers.

It's fair to say there are many traps with the Brightline rules and many situations are fact specific in terms of whether it will apply to a land sale. There is likely to be a large increase in taxpayers caught by Brightline as a result of the timeframe being extended from two to five years and now possibly further.

A further extension of Brightline would also decrease supply of property to market as owners hold onto land, they might otherwise sell to avoid tax, further driving up price.

It is accordingly advisable to seek the input of a tax expert when contemplating residential land transactions in NZ.

The IRD are clearly monitoring all land sales and those falling short of the Brightline timeframes can expect to be picked up.