Inland Revenue (IRD) will soon begin issuing letters to taxpayers within a month of them selling a residential property.
These will be sent as soon as the tax department identifies a transaction that potentially falls within the bright-line rules, to ensure people are aware of any possible tax obligations.
IRD says initially there will be a couple of catch-up rounds to account for residential property sales from November to June 2021.
From there, they will issue letters monthly as sales occur.
What to do if you receive a letter
In some circumstances, IRD may not be applying the law correctly because they don’t have all relevant facts.
Last year, the department acknowledged it sent letters by mistake to taxpayers whose property transactions did not fall under the bright-line test.
Still, it pays to speak to a tax professional if you are unsure or have any questions because the taxation of property is quite complex.
If you have sold a house and not returned the correct taxes, then you should complete a voluntary disclosure as soon as possible.
This can see the shortfall penalties IRD may seek to impose on the unpaid tax reduced. Shortfall penalties range from 20 percent up to 150 percent of the tax liability, depending on the seriousness of the mistake.
As an IRD-approved tax pooling provider, Tax Management NZ can eliminate late payment penalties and reduce the interest that the taxman may already be charging on the income tax amount owing as a result of a property sale, provided legislative requirements are met.
Please contact us to find out how and when we can assist with tax obligations that arise when a property sale meets the bright-line criteria.
The bright-line rules
The bright-line test means if you sell a residential property within a set period after purchasing it you will have to pay income tax on any profit made through the property increasing in value, unless there is an exemption.
It also applies to New Zealand tax residents who buy overseas residential properties.
Please refer to the table below to see which bright-line period applies.
| If the property was purchased… | Then the bright-line sale period that applies is… |
| On or after 27 March 2021 | 10 years |
| Between 29 March 2018 and 26 March 2021 | Five years |
| Between 1 October 2015 and 28 March 2018 | Two years |
The bright-line test does not apply to houses purchased before 1 October 2015.
Please note the Government has also indicated new builds acquired on or after 27 March 2021 will continue to be subject to the five-year test.
Exemptions
Generally, the bright-line property rule does not apply to a sale of property that has been your main home, inherited property, or if you’re the executor or administrator of a deceased estate.
It’s important to keep in mind that the main home exemption is not infinite, and can only be used twice in a two-year period.
However, different rules apply to someone’s main home depending on when it was acquired.
Prior to 27 March 2021, a property was considered a main home if the owner had lived in it or used it as a main home for at least 50 percent of the time that they owned it.
Recently, though, the Government has introduced a ‘change-of-use’ rule.
This states that, after a sale, income tax will be payable for any period of more than 12 months if the property was not being used as someone’s main home.
Visit IRD’s website for more information on the bright-line test and other property rules.