Government Brightline Test Changes – Five to Ten articles

New Zealand house unaffordability

The boom in house prices is a runaway train with the New Zealand house market a world leader for unaffordability. New Zealand’s housing affordability is getting worse, with prices now seven times the median household income.  During 2020, the nationwide median house price soared by 19.3% to $749,000 according to the Real Estate Institute of New Zealand with this compared to a mere 1.8% in 2018.  During quarter 4 last year the median increased by an astonishing 8.7%. Alongside the national increase every region, except Auckland and Otago, hit record average asking prices, with a number of regions reaching record price milestones. The average asking price in Auckland is over $1,000,000.  There is a noticeable drop in supply noted by a number of property experts which is affecting prices and rentals.

Housing policy changes announced 23 March 2021

A number of new initiatives were announced this morning by the Prime Minister.  This includes:

• funding being put aside to accelerate housing supply;
• changes to First Home Grant caps; and
• changes to interest deductibility.

The Government aims with these policy announcements to help more people to be able to purchase property.

Brightline Tests

Brightline tests were put in place some years ago and affect the buying and selling of property on or after 1 October 2015.  If an affected residential property is sold and has not been owned for more than the Brightline Test period there may be a liability to pay income tax.  This rule also applies to New Zealand tax residents who buy overseas residential properties.

As part of the housing policy announcement this morning by the Prime Minister, the Government intends to change the requirements to the Brightline Test so that people who buy and sell an existing property within 10 years of its acquisition on or after 27 March 2021, will be taxed upon the profit made on the conveyancing transaction.  Prior to this just-announced policy change, the Brightline Test period was 5 years.

There are some exemptions to the tax liability.  These exemptions include:

• property that is acquired through inheritance;
• if you are the executor or administrator of a deceased estate;
• if the property is used as your main home for the entire period you own it; or
• if the property was acquired before 29 March 2018.

In addition, the new 10-year Brightline test does not apply to new build homes which will still be subject to the 5-year test.

It is important to note that the date of the property acquisition is the date of the transfer not the date of the Agreement for Sale and Purchase.

The definition of what constitutes a new build is not determined yet but is possibly going to be a newly built property with a Code Compliance Certificate from the applicable local council less than 12 months old.

The Government intends to introduce a “Change of use” concept whereby a change of use from main home to some other use for longer than 12 months will reflect in an obligation to pay tax on profit made proportionately in its use non-main home.

The specific legislative mechanics to the Brightline Test changes are subject to Parliamentary approval and Royal Assent.

Other housing policy announcements

There are other property changes covered in the Government’s announcement for property investors.  Significant changes that the Government intends to introduce from 1 October 2021 will mean that investors will not be able to claim interest on loans for residential properties as an expense against income.  The impact of this is likely to lead to an increase in rentals charged on residential properties.

Revenue Minister David Parker said that this change is to disincentivise investor demand for residential property investment and allow more room in the housing market for first home buyers.  Feedback from the NZ Property Investors Federation on this change has been negative, with claims that the only people who will be able to buy rental properties in the future will those who are highly cashed-up purchasers.

On the positive side, the Government has announced a fund of $3.8b to boost new house builds, by funding services and infrastructure for housing developments.  This funding is expected to start to be spent in the second half of this year.

For more information, please contact a member of our Property team.