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 www.oneroof.co.nz/news/38928. 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…