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11 July 2018

A Bright-Line Trap for the Unwary

The Bright-Line Test, introduced into New Zealand’s tax legislation in October 2015, has been described by a number of commentators as a quasi-Capital Gains Tax on land. The rules were intended to slow speculation by investors and take some heat out of the property market.

Many people will be aware that a property purchased for use as their “main home” is generally not subject to the Bright-Line Test.  But, there are situations where Purchasers buying a house to live in themselves might inadvertently be caught out by the new rules.

For example, the purchase of a property under a “house and land” package, or an apartment “off the plans”, which is later settled by a Family Trust or other entity nominated by the original Purchaser, can lead to unintended tax consequences.  There is a little known but important provision in the rules which says that a “nomination” is deemed to be a disposal, or sale, of the property.  This is because the start date for calculating the Bright-Line Tax timeframe on these “off the plans” agreements is the date of the original agreement, not the date of registration of the transfer, as it is for a standard purchase.

Therefore, if nomination occurs after the date of the agreement and within the Bright-Line Test timeframes, the IRD will deem the nomination a disposal by the original Purchaser.  As such any gain occurring between the original agreement date and the nomination date becomes taxable.

The trap arises because agreements to purchase property under construction will often have the settlement date determined by either the date on which a new title is created, or the Code Compliance Certificate is issued by Council, or both.  There may be a significant wait period for these documents during which there will more than likely be an increase in value, and because the new house or apartment has never been occupied, the main home exemption is not available.  Therefore, the increase in value will be taxable.

Our message is that if you are considering the purchase of either a “house and land” package or an “off the plans” apartment or unit, make sure you discuss your plans with your lawyer and tax adviser early on to avoid being caught out unnecessarily.


The above information is of a general nature only. You should contact our firm for advice relating to your specific circumstances.


Mark Bond

About Mark Bond

Mark is a member of our Property Team. He assists clients with various residential and commercial property transactions, including associated company and trust structuring.

View all posts by Mark Bond