A new "bright-line" test is being introduced that will impose income tax on any gain from residential land purchased and sold (or otherwise transferred) within two years, unless an exception applies.

The new rule will apply from 1 October. However, it will not technically become law until sometime after 22 October, being the date by which the Select Committee considering the draft legislation (and submissions on the legislation) must report back to Parliament. Our discussion below is based on the draft of the Bill that is with the Select Committee, so there could yet be some change to the details of the test.

Key exceptions

The bright-line test will apply to the transfer of residential land, with exceptions for:

The main home, being the property used predominantly, for most of the time that the seller has owned the property, as their main home.

Transfer following death to an executor, administrator or beneficiary, and subsequent disposal by those persons.

Transfer under a relationship property agreement (where a relationship breaks down). The bright-line test may apply to a subsequent disposal within two years of the transfer.

What is residential land?

Unlike the property information tax measures which also take effect from 1 October, the bright-line test will not apply to non-residential land.

The Bill’s proposed definition of residential land is land that has a dwelling on it, land where there is a plan or understanding to build a dwelling on it and bare land that by its area and nature is capable of having a dwelling erected on it. IRD says the latter will include bare land zoned as residential.

Land used predominantly as business premises or farmland (including forestry, horticultural and pastoral businesses) will not be residential land.

Two year bright-line period

The two year period for the bright-line test will span the date of acquisition of the property to the date of disposal. In practice, due to different tests applying for the date of acquisition and the date of disposal, the bright-line period could be regarded (from a layperson’s viewpoint) as spanning more than two years.

The date of acquisition will generally be the date of registration of transfer of the land. By contrast, the date of disposal will generally be the date that the seller enters into an agreement for the sale of the property (ie a conditional agreement that is subsequently settled), not the later date that the disposal is registered.

This means that the date of disposal for the seller (eg conditional agreement to sell) will be earlier than the date of acquisition of the same property by the buyer (registration of transfer). This is deliberate, to prevent the bright-line test being thwarted by sellers, merely by extending the settlement date.

Special acquisition and disposal dates are proposed in some situations. For example, when buying "off the plan", the acquisition date will occur on entry into the contract to purchase, while subdivided land will be deemed to be acquired on the original date of registration of transfer for the undivided land. The disposal date for land disposed of by gift will be the date of registration of transfer.

Transitional measure

Although the acquisition date will generally be the date of registration of transfer, as a transitional measure the bright-line test will only apply to land for which an agreement for sale and purchase is entered into on or after 1 October 2015. For acquisitions other than by sale and purchase, the bright-line test will apply if registration of title occurs on or after 1 October.

Multiple main home sales within two years

The main home exception will not apply to a sale if, within the two years immediately preceding the date of disposal, that exception has applied to two or more other sales by the same seller.


Unlike the new property tax information rules, residential land owned by a trust can qualify for the main home exception, but only if both:

The trust-owned property is the main home for a beneficiary of the trust; and

The principal settlor of the trust does not personally own a main home (the principal settlor being the person who has settled the most property, by value, on the trust).

In addition, if the principal settlor is a beneficiary of the trust and the trust owns the property that is the settlor’s main home, the main home exception applies only if it is that dwelling which the trust is selling, not another dwelling owned by the trust in which another beneficiary resides.

Involuntary disposals

The bright-line test will apply even where a disposal occurs involuntarily in the bright-line period, due to compulsory acquisition (eg under the Public Works Act) or mortgagee sale. Even in Auckland’s rampant property market, it may be unusual for this to result in a taxable gain being made by the debtor on a mortgagee sale of residential land that had been bought as an investment.

Gains and losses

In determining the extent of any gain or loss, ordinary tax rules will apply. The person disposing of the property, whether by sale, gift or otherwise, will be deemed to derive market value, where the transfer occurs for less than market value.

Costs of disposal and acquisition, such as conveyancing costs and real estate commissions will be deductible in determining the net gain or loss, as will costs of improvements to the property.

If a loss, rather than a gain, occurs on a disposal of residential land to which the bright-line test applies, the loss will be recognised for tax purposes. However, losses will be ring-fenced and only able to be offset against taxable income from other land sales under either the bright-line test or any other tax rule regarding land sales in sections CB 6 to CB 15 of the Income Tax Act.

No loss will be recognised on a sale to an associated person, due to concerns that losses will be engineered.

Land-rich companies and trusts

Anti-avoidance measures are proposed to prevent land-rich companies and trusts being used to circumvent the bright-line test. A land-rich company or trust will be one where at least 50% of the value of the company or trust is attributable to residential land. Where 50% of the shares in the company are transferred in a 12 month period or changes are made to the trust deed or to a decision-maker of the trust, with a purpose or effect of defeating the intent and application of the bright-line test, then a disposal of residential land will be deemed to have occurred.

Residential land withholding tax (RLWT)

In order for the bright-line test to be maximally effective, IRD has proposed introducing a RLWT that would apply (from July 2016) where the land sold is in NZ and the seller is an offshore person (which will include a NZ citizen who has not been in NZ in the three years immediately prior to the sale).

The conveyancer or solicitor involved in the sale would be required to withhold the RLWT, being the lower of:

If determinable, 33% of the seller’s gain on sale (being sale price less acquisition price, with date of and cost of acquisition to be ascertained from a certified copy of the agreement by which the property was acquired); and 10% of the purchase price.

The RLWT would not be a final tax and a tax refund could be claimed if the amount of income tax charged on the actual gain was less than the amount of RLWT.

The RLWT proposal is not included in the Bill introducing the bright-line test, but has been raised by IRD in an Issues Paper on which it has invited submissions by 2 October. If, as expected, the proposal proceeds, draft legislation will follow at a future date.

A wider tax net

Finally, a word of caution. The bright-line test is intended to make it easier for IRD to ensure speculators pay tax on residential land bought and sold within two years, even though other tax rules already apply to such trading.

However, the bright-line test will bring within the tax net some sales that previously would not have been taxable otherwise. For example, residential land bought as a long-term investment (and not for use as the main home) will be taxable under the bright-line test if sold within two years of acquisition (eg due to a change of personal or financial circumstances), even though the gain would not be taxable under current rules that tax gains on property bought with a purpose or intention of resale.


There is a plethora of information available in the media at the moment lamenting the ongoing property boom for the next 2-3 year; we thought it might be interesting in this edition of INVEST-igate to look at what this may mean from Auckland if it continues long term. The below article was featured in the NBR last month by Geoff Simmons:

Catching up with friends living in London the stories are remarkably similar to those in Auckland but on a whole other level. The city is awash with tales of hard working young people unable to save fast enough to get on the property ladder. My only friends that managed this Herculean feat are a young professional couple who bought a slumhouse in London’s unfashionable East End. And the supposed cause is similar too – ‘foreigners’ (however defined) buying all the property. 

So what can London tell us about Auckland’s future? 

There will always be more demand than supply The enduring popularity of London ensures that demand for housing has outstripped supply for decades. The limitations of land and transport congestion have meant that supply is constrained to increase only slowly – far more slowly than demand. 

The results of this are two fold. First – as in any market the price increases to choke off demand. In this case the prices are not just house prices but also rent. As these rise, people simply can’t afford to live in London, particularly if they can’t command a wage that covers the costs of living – namely housing and transport. 

The second impact is migration. Generally the pattern in England is that London sucks in the new immigrants – much like Auckland does. As supply of housing has become increasingly constrained, London hasn’t stopped attracting immigrants, instead it spits out an equal number of English people. In other words, every time London house prices reached new records the locals chose to sell up, move out of the city, and live off the proceeds. We are starting to see this pattern in Auckland, and it will happen more. 

So far, this is no big deal. If anything it is the market responding to the circumstances. In London Monopoly terms, we can’t all live in Park Lane and Mayfair. The price clears the market. 

The real problems begin when housing becomes an investment, rather than a house However, this alone does not explain the London property market. All my young professional couple friends can afford to live in London – they can pay rent – but they can’t afford to buy. This is because house prices have grown way out of whack with the rental market. Sound familiar? The same is true of many places in New Zealand – but particularly Auckland. The value of the asset has grown out of whack with the returns that asset can generate (rent). That is a sure fire sign that investors are banking on capital gain. 

This is a clear signal that housing has become primarily an investment in London, as it is becoming in Auckland. This is best illustrated by the ubiquitous anecdotes that fly around London housing conversations. Russian oligarchs, Saudi oil barons, Chinese tycoons all have a pad in London. Do they live there? No. Do they rent it out? Hell no. Do they have more than one property? Probably – after all who knows which suburb their daughter might want to live in when they go to University?

Is there any proof that this is happening? Data is better than in the UK than in New Zealand, but still poor. We know that around a third of property purchases in London are made by foreign buyers. We don’t know how many houses lie empty. 

Why is this? In shaky, uncertain times, London housing is seen internationally as a safe place to stash your cash – it is up there with gold. Since 2009, London property prices have risen 70% – at a time when wages in the UK have been stagnant. The belief is that prices simply won’t go down, so every billionaire has one or more London properties in their portfolio. This is exactly the direction that Auckland is heading in, but no politician has the guts to stop it. 

Fiddling at the edges Like New Zealand, Britain does little more than fiddle at the edges of these problems. And now the London real estate market is so out of kilter it literally is too big to fail. If someone tried to sort the problem now it would bring the whole house of cards crumbling down – including the banks. 

Some of the populist policy responses have made the problem worse. To keep teachers and nurses in London the government has decided to help them buy houses, to the extent of going in as part owners. That does nothing to dampen house prices. 

In some respects Britain does more than New Zealand to curb the investment excesses in housing. Rates are relatively high here – they collect far more revenue than their equivalents in New Zealand. However, rates levels don’t reflect property prices, so mansion owners pay a tiny proportion of the value of their property in rates.

There is also a ‘stamp duty’, effectively a transaction tax for the sale of houses that rises with the value of the house. There is even an inheritance tax; although in practice the truly rich can avoid paying it so it falls on the unsuspecting middle class who have got rich on the back of the property market and neglected to plan a tax efficient way of passing it on to their kids. 

Finally, there is a capital gains tax on investment housing (not the family home) – at a lower rate than income taxes. This alone is proof that the Labour/ Greens proposal at the last election would have done nothing to stop the rot in Auckland. 

Reform options With the dip in the Russian and Chinese markets and the revival of the British pound, there are signs the trend is easing. Sadly for us the falling New Zealand dollar may mean that international sights turn on Auckland instead. Why wait and allow the whims of international speculators determine our future? A much better solution would be to ensure that property is no longer viewed as an investment.