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National-Act Coalition Announce Intended Changes to Brightline Tax

National-Act Coalition Announce Intended Changes to Brightline Tax

Finance Minister Nicola Willis yesterday announced an immediate decision to bring the Brightline Test for residential property back to two years, effective from 1 July 2024.

Brightline Tax

Currently, if you sell a residential property in New Zealand that you have owned for less than 10 years you may have to pay income tax on any gain on the sale, unless an exclusion or rollover relief applies.

The Brightline Test looks at whether a property was acquired:

  1. on or after 27 March 2021 and sold within 5 years for qualifying new builds, or within 10 years for all other properties;
  2. between 29 March 2018 and 26 March 2021 and sold within 5 years;
  3. between 1 October 2015 and 28 March 2018 and sold within 2 years.

Income Deductibility

Hon Nicola Willis also confirmed the Government’s commitment to fully restoring interest deductibility for rental properties, with further details on this being announced in the New Year.

Under the previous Government, interest could not be claimed for residential properties acquired on or after 27 March 2021 unless an exclusion or exemption applied. For existing loans, the Government was phasing out interest deductibility over a 4 year period. We anticipate that the re-introduction of interest deductibility will be phased in over time for existing loans.

Effect on New Zealanders

A two-year Brightline Test will likely encourage investors to purchase residential properties, as they no longer need to hold property for 10 years to avoid paying Brightline Tax. Furthermore, the potential re-introduction of interest deductibility is advantageous for owners of rental properties.

As a result of this greater demand, house prices are likely to increase, which could affect the ability of first home buyers, for example, to enter the property market. Increased house prices, together with higher bank interest rates, could result in Landlords passing on their increased costs to Tenants through rent hikes.

Conversely, property owners who have been waiting for the expiry of the 5- or 10-year Brightline period (as the case may be), may look to put their properties on the market come 1 July 2024, as they could no longer be subject to Brightline Tax.

For tax purposes, a property is generally acquired on the date the property is registered in the purchaser’s name (e.g. on settlement). For a sale, however, the date of disposal is the date a binding Agreement for Sale and Purchase is entered into (even if the Agreement is still conditional). We anticipate the new legislation will reflect these acquisition and disposal dates, meaning if you are intending on selling a property that could be subject to Brightline Tax, we recommend not entering into an Agreement for Sale and Purchase until after 1 July 2024.

The Government have included these changes in a taxation Bill currently being considered by the Finance and Expenditure Committee, but may be subject to change in the New Year. If you are considering buying or selling residential property, please contact us for specific legal advice.