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New Zealand: Inland Revenue enforces the residential “bright-line test”

New Zealand: Residential “bright-line test"

Inland Revenue is contacting individual taxpayers that it considers as not having paid tax on certain property transactions.

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Taxpayers that have bought and sold a residential property in the last few years may be subject to inquiry from Inland Revenue. As part of this inquiry, Inland Revenue recently sent letters to tax agents informing them that certain clients may have entered into transactions subject to the residential “bright-line test.”

Taxpayers may become inadvertently caught up in these rules and the related tax obligations, in several different ways—for example, through the acquisition of property in their own name and then a subsequent transfer within a short time frame of the property to a family trust.   

The letters state that these taxpayers are required to pay income tax on any profit they have made on the sale of bright-line residential property. The letter requires taxpayers to complete the bright-line IR833 form and pay the amount of tax due (or if overdue, they may need to file a voluntary disclosure). Penalties and interest may apply if the tax is overdue.


Bright-line test

The bright-line test for residential property was introduced in 2015 and extended in 2017. It applies to any person that sells a residential property:

  • Within two years of it being bought, between 1 October 2015 and 28 March 2018 (inclusive)
  • Within five years of it being bought on or after 29 March 2018

The test treats a gain on the sale of the property as income, with exclusions only for the sale of the main family home, or when property is sold after it has been inherited. Taxpayers selling property within the two-year or five-year bright-line periods are expected to consider whether the test and exclusions apply.


KPMG observation

Until now, there has been little enforcement activity from Inland Revenue on this issue.  However, Inland Revenue’s data shows that up to 25% of taxpayers may not have disclosed and returned taxable income arising from property transactions subject to the bright-line test.  There are certain action steps that taxpayer may consider if they receive a letter from Inland Revenue.

Read a November 2020 report prepared by the KPMG member firm in New Zealand

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