What is a bright-line test?

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The innocuously labelled “bright-line test” has been a hot topic in the past few days, getting politicians, the real estate industry and first-home buyers all het up.

House sold sign, house auction sign, key.

Photo: RNZ / 123rf

The government yesterday announced a suite of changes designed to “tilt the balance” toward first-home buyers.

Among other changes, the bright-line test rule was extended from five to 10 years.

So, what is this test? What does it mean?

Bright-line test in New Zealand

The rule was first introduced in New Zealand in 2015 when the then National government put it into the income tax rules.

It applied to any person who sold a residential property that was not their main/family home within two years of being bought, between 1 October 2015 and 28 March 2018 inclusive.

What the test does is it treats any financial gain made on the sale of the property within that period as income – which can be taxed.

It is that income – in essence the capital gain – not the whole value of the property, that is taxed. The profit made from the sale will be added to the person’s income and will be subject to the marginal tax rate.

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The rule also applies to any New Zealand tax residents who buy overseas residential properties.

Exclusions for the rule include a person’s main home, a main home held in a trust, or a residential property that is inherited.

Bright line test proposed changes - April 2021

According to the Inland Revenue website, “the bright-line period starts on the date the property’s title is registered with Land Information New Zealand (LINZ) and ends when you enter into a sale and purchase agreement.

“If the property is in another country, the bright-line period starts on the date the transfer was registered under that country’s laws.

“The bright-line period for properties purchased “off the plans”, where the title has not yet been issued, begins when you sign the agreement to purchase the land.”

In 2018, the Labour-led government extended the bright-line test to five years of a house being bought on or after 29 March 2018.

On Tuesday the government extended the test further to 10 years bought on or after 27 March 2021, but also gave an exemption to new build houses (five years instead of 10).

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Bright-line test definition

The term ‘bright-line test’ is a legal term in US constitutional law.

It means “a clearly defined rule or standard that uses objective points to avoid ambiguity”.

By making the rule clear and unambiguous, a bright-line test is intended to have consistent outcomes when it is applied.

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