The Government has recently announced an increase to the bright-line period for residential properties under the Taxation (Annual Rates for 2020-21, Feasibility Expenditure, and Remedial Matters) Bill (“the New Legislation”). The increased ten year period came into force on 27 March 2021.

What is the Bright-Line Test?
Firstly, let’s recap what the bright-line test is. It is a law used to determine if an owner of residential property is required to pay tax on any profit of a sale.

The bright-line rule is clearly defined and leaves no room for interpretation. You can think of it as someone drawing a line in the sand. It’s clear when you cross that line. It does not allow for a change in circumstances. For example, illness or a change in financial circumstances.

Key Dates

The 10 Year Bright-Line Period
A ten year bright-line period will apply to residential properties acquired from 27 March 2021.

The 5 Year Bright-Line Period

The five year bright-line period will apply to properties acquired from 29 March 2018 until 26 March 2021.

The 2 Year Bright-Line Period
The two year bright-line period will apply to residential properties acquired between 1 October 2015 and 28 March 2018. Any properties purchased prior to 28 March 2018 will of course no longer be captured.

Bright-Line Start Date
The bright-line period starts from the date of registration of the transfer of title, which is generally the settlement date. Therefore, if a registration of the transfer of title (i.e. settlement) did not occur by 27 March 2021, the ten year bright-line period will apply, unless the transitional period below applies.

Transitional Period
The New Legislation provides the five year bright-line period will apply if an offer was made on a property on or before 23 March 2021 which could not be withdrawn before 27 March 2021. This will cover situations where tender offers were made before 23 March, but were not accepted until after that date.

New Builds
The bright-line period for new builds is calculated differently. The bright-line period generally starts the date the agreement is signed (rather than the registration/settlement date). The start date may be affected by a nomination of another entity to complete the purchase.

The ten year bright-line period is not intended to apply to new builds. It is intended that new builds will remain subject to a five year bright-line period.

It is our understanding that the definition of a “new build” will be subject to consultation later in 2021.

There are still limited circumstances when the bright-line test may not apply, including the following:

• If the property is the person’s main home (there are a number of restrictions to this exemption). There have been substantial changes to the meaning of “main home” and it is important to ensure that all criteria is met to be eligible to claim this exemption.

• If the property was acquired from a relationship property settlement, there will be roll-over relief for the person who receives the property. There must however be a formal separation agreement signed in order to be eligible for such roll-over relief.

• If the property is inherited. It does not matter when the property was originally purchased by the deceased, the bright-line period does not apply.

Impact of a Change of Entity
It is important to note that a change of entity will re-start the bright-line period. For example, a transfer to a family trust, or to a company.

A change of trustees does not mean a change in entity. A change in trustees will not re-start the bright-line period.

Existing Properties
As explained above, the ten year timeframe applies only to properties that are acquired from 27 March 2021. This new change to the bright-line legislation will not affect any property you currently own (unless you transfer this to a different entity).

If you are not sure which bright-line period applies to your property, or if you are eligible to claim an exemption, we are here to help you.