Will I Need to Pay Tax Under the Bright-line Test
Will I Need to Pay Tax Under the Bright-line Test?
In response to the soaring house prices nationwide, the Labour Government announced changes to the bright-line test on 23 March 2021, which affect both first home buyers and investors.
The Bright-line Test
What is the bright-line test?
Any profit gained from the sale of residential property, with several exemptions discussed below, that is sold within the bright-line test period, is likely be to be subject to income tax.
Exemptions to the Bright-line Test
The bright-line test does not apply: -
1. If you are selling your main home (which is defined as the place you physically live during the majority of the bright-line test period) if it was:
1.1. Acquired before 27 March 2021. If the property was used as your main home for more than 50% of the time during the bright-line test period (see below), the main home exclusion will apply. Therefore, you will not pay tax on any profit when you sell your house, no matter how long you have owned it for.
1.2. Acquired on or after 27 March 2021. If the property was used as the main home 100% of the time during the bright-line test period, the main home exclusion will apply. Therefore, no tax is payable on any profit when the house is sold, no matter how long you have owned it for.
2. The change in use rule
The ‘change in use rule’ was introduced as at 27 March 2021 which apportions the amount of tax payable, in relation to the period of time the house was used as your main home compared to the period of time the house was not used as your main home, during the bright-line test period.
The ‘change in use rule’ applies to both existing and new builds.
If you do not use your house as your ‘main home’ for any continuous period or periods of more than twelve months during the bright-line test period, the main home exclusion will not apply.
For example:
You acquired your home on 27 March 2021. The bright-line test period will be ten years. You used the house as your main home for six out of the eight years that you owned it. You sell your house and the Sale and Purchase Agreement becomes unconditional on 27 March 2029. 25% of the profit from the sale will be subject to income tax.
3. To property that is acquired through inheritance from a deceased person’s estate property.
4. To property received by you as part of a relationship property settlement.
5. To property acquired before 1 October 2015.
What is the bright-line test period?
The following factors will be considered when determining if you will be required to pay income tax: -
1. How long the bright-line test period will be for the property; and
2. When the bright-line test period starts and ends.
The date of acquisition and the start date for the bright-line test period are usually different dates.
How long is the bright-line test period?
To determine if the bright-line test period will be five or ten years, you need to ask yourself “when did I acquire the property (“the Date of Acquisition”)?
The Date of Acquisition is generally the date a purchase agreement has been entered into, even if conditions in the agreement still need to be confirmed, and settlement completed.
The bright-line test period has increased from five years to ten years for any property where the Date of Acquisition is on or after 27 March 2021. Therefore, if the Date of Acquisition of your property is on or after 27 March 2021, you must own the property for ten years (the bright-line test period) for it to be exempt from income tax.
For any agreements entered into from now, the bright-line test period will be 10 years.
What is the start and end date of the bright-line test period?
The start date for the bright-line test period is (most commonly) the official transfer date, i.e. the date of settlement (“the Settlement Date”).
The bright-line test period ends when the agreement to sell the property becomes unconditional.
For example:
The Date of Acquisition of your house was 27 March 2021. Therefore, the bright-line test period will be ten years.
The date you purchased the house (i.e. the Settlement Date) was 20 April 2021. This is the start date for when the ten year period begins. The agreement to sell your house became unconditional on 30 August 2030. As the period constitutes nine years, four months, ten days, you will likely be taxed on any profit made.
New Builds
The definition of a new build is currently being considered by the Government.
The extension of the bright-line test period does not apply to new builds. Therefore, owners of new builds, where the Date of Acquisition is on or after 27 March 2021, will continue to be subject to a five year bright-line test period.
For example:
If you sell your new build, and the period from the date you purchased the house (i.e. the Settlement Date) to the date the agreement to sell the property becomes unconditional is not five years, you will likely have to pay income tax on any profit you made from the sale. If the period is 6 years, no income tax on any profit is likely to be paid.
