Context and land generally

The taxation of property transactions has long been misunderstood in New Zealand.

For many decades now, property purchased with an intention or purpose of resale has been taxable when sold.  This provision still exists. 

Some commentators suggest the intention rule ceases to apply after ten years of property ownership.  See for example Ashley Church: “The Bright Line Test and other silly laws” published in January 2021 by internet advertising company Oneroof Limited – refer This is simply untrue

However, historically it has been and remains hard to prove subjective intention or purpose and, other than the most blatant of cases, IRD have been understandably reluctant to judicially challenge using these provisions.

Other land taxing provisions

Irrespective of intention at time of acquisition, there are numerous other provisions serve to include the sale of property as being on revenue account and taxable. 

For example, income from land that is part of the businesses of dealing, dividing or developing land or erecting buildings is taxable, as is land sold within ten years by someone associated with these businesses.  There are other provisions hat can apply, and there are some exceptions. 

Introduction and initial purpose of Brightline Rules

New Brightline Test rules applying initially for two years (land acquired from 1 October 2015) and then five years (land acquired from 29 March 2018) provided some certainty – residential property acquired and sold within these timeframes is now simply taxable – subject to only a handful of exemptions.

This simplicity made it easier for IRD to capture many of those transactions where a purpose or intention for resale often existed, but was difficult to prove.  The measure is blunt but indisputably effective.

But now things have got messy…

Extension of Brightline Rules to ten years and hijacked purpose

In December 2020 the NZ government announced they were looking into the success of the Brightline Test to assess whether it had succeeded in cooling a rapidly heating housing market.  (

That consideration of the current state of the housing market culminated in the government’s 23 March 2021 announcement to:

  • extend the Brightline period to 10 years of ownership, with a possible exception for new builds,
  • introduce a change of use rule regarding main home exclusions,
  • progressively remove interest deductions on residential properties other than new builds, and
  • Introduce limitations on the number of times the main home exclusion can be utilised.

To suggest a ten year time frame is required to curb the activities of property speculators is at best based on a decidedly poor foundation, and at worst, simply the introduction of a capital gains tax by stealth.  It’s an interesting political dynamic given that in April 2019 the Prime Minister categorically ruled this out –  “we will not be introducing a capital gains tax” – see Radio NZ article at

Consequences wide reaching

Putting the politics aside, taxing gains on a property held for such a long (ten year) period would then, in the absence of any legislative change, be including at least some inflationary component within taxable income.  There is no doubt that many taxpayers who by most definitions would never have been considered property speculators will be affected by these changes – many significantly and very adversely.

Take for example a married couple buying a rental property for say $600,000, retaining it for 7 years before any one of a number of potential life events surprise them, and they end up selling for $1,000,000.  Under current rules, that couple would have had interest deductions of say $210,000 (600,000 x 5% x 7 years) and the $400,000 capital gain would be tax free (as would a gain on a painting or shares or a classic car).

Instead, under Brightline provisions, that same couple will be required to include the $400,000 capital gain within income. 

Simulteneously, their annual interest deductions will be denied, perhaps permanently although these interest deductions may eventually be allowed if the brightline test applies.  Consultation on this is ongoing. 

Legislation for this is unlikely to be enacted until March 2022.

While Government’s intention is clearly designed to affect homeowner’s behaviours.

What is IRD doing?

Given the extension of the brightline to ten years it has become clear that IRD is beefing up their enquiries in the land transaction space.  We have seen several instances recently of IRD using publicly available records to select addressees for proforma letters regarding application of the Brightline Test. 

Despite there being many legitimate reasons why a title for land may have been held for less than ten years, IRD are already outrightly stating to taxpayers in that letter that unless the main residence exemption applies, they will be subject to Brightline.

Incredulously, IRD commence the letters by advising taxpayers the letters are simply an “FYI” category of correspondence – only to then tell them the sales “may” be taxable, later in the letter advise they “are” taxable, and finally to demand information in a very short timeframe.  The context, structure and format of these letters are so poor that we have even had a client ask us if this correspondence they had received was “the next Nigerian Scam”.  We have published a second item on these aspects.

Are the Brightline rules working?

In short:

  • The legislative mechanisms may be working in the context of achieving a tax impost on previously untaxed capital gains and no doubt at least capturing some ambiguous scenarios regarding taxpayer’s intention or purpose in relation to their property acquisitions.
  • However, there is a very long way to go before the property market could be said to have cooled, and if so whether the tax changes could be given any real credit for aiding or resulting that cooling.

In the interim there are very real problems that the new 10 year extension will amplify.

There are some unintended consequences that need to be fixed.  We have clients with land sales caught by the provisions that wouldn’t be if the drafting was better:

  • Land was transferred from a deceased person to their estate (a ‘different taxpayer’). The estate carried out a minor subdivision of land and is now potentially caught by the Brightline Rules given the legislative drafting is ambiguous in respect of its application to forms of interest in land and the definition of residential land; and associated persons rules transferring acquisition dates alongside transfers of land between associated persons for purposes of most land provisions does not apply for Brightline purposes.  [We are seeking a binding ruling to potentially address the ambiguity regarding interests in land]
  • A family trust acquired land assets many decades in the past, then resettled its assets onto a new trust for a similar but different group of beneficiaries, thereby resetting the acquisition date for Brightline purposes. As a result, a subsequent disposal was caught by the Brightline Test provisions when, again, if associated persons rules applicable to other land taxing provisions also applied for Brightline purposes – no taxation would arise.

So where to from here?

We have worked with CPA Australia to draft a submission on these most recent changes, and the final submission is available at

CAANZ has published their submission at


In relation to Brightline this is principally to extend the associated persons rules applicable to other land taxing provisions to also apply to Brightline provisions.

The submission also covers many principles applying to the proposed interest limitation on residential property – including principally a reduction of the proposed complexity suggested by IRD to instead use established principles of apportionment and deductibility.

We’ll keep you posted. 

In the interim, any owner of residential property needs to carefully consider the Brightline provisions if they:

  • have a residential property that they rent out, or they acquired on or after 27 March 2021,
  • are wanting to restructure family trusts or related entities,
  • are looking at buying a residential property for any purpose, or
  • are subdividing any property and not caught by other land taxing provisions,

In any of these cases, we strongly recommend seeking professional specialist tax advice.

It remains to be seen whether the restrictions have any of the effects intended by Government.  In particular, whether encouraging retention of properties by owners will indeed translate to slowed value growth seems to defy this author’s memory of demand and supply rules from economics 101.

I wouldn’t bet the house on it!





4 thoughts on “Brightline test getting brighter

  1. Others that have been caught are people that haven’t been able to settle on a property because they have lost their job due to COVID and are forced to sell and make an unintended profit.

  2. Thanks for doing a great job.
    National have promised to reverse some of these provisions – lets hope that they listen to reason and get the correct advice.

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