Bright-line Rules Update
Bright-line rules came into effect on the 1st of October 2015. These rules apply to residential land only and were introduced to take away any debate about a person’s intention if residential land was sold within the Brightline period.
Bright-line rules mean that if a taxpayer sells residential land within the bright-line period, it will be taxable – subject to limited exclusions.
The Bright-line periods are:
- 2 years if interest acquired on, or after, 1 October 2015
- 5 years if interest acquired on, or after, 29 March 2019
- 10 years if interest acquired on, or after, 27 March 2021
First interest acquired is the date a contract has been entered into. This establishes what period applies. When considering whether the property was sold within the Bright-line period, you need to look at the date the property was settled and the date a contract agreement was entered into to sell.
The process we need to follow is:
- Have you sold residential land – Yes/No
- What Brightline period applies 2yr 5yr 10yr
- Is the property a new build?
- Has the property been sold within the Bright-line period?
- Do any rollover rules apply?
- Do exemptions apply? – Farmland – Business – Main home
New builds continue to be subject to a 5 year bright-line period. A new build is defined as a self-contained residence added to vacant land with a certificate of code of compliance issued on or after 27/03/2020 or additional self-contained residence added to an existing dwelling, or a commercial premises converted to self-contained residence.
In scenarios where parents have helped guarantee bank debt and the bank has required parents to be on the title as owners., it is important to keep records that prove that the parents were only on the title due to bank requirements as opposed to being the legal owners. This is so when the kids are able to stand on their own two feet and title is transferred from the parent’s name that bright-line is not triggered.
A good idea would be to prepare a deed which should provide indemnity for the parents, outline mortgage repayment obligations for the kids, deal with rates, insurance etc for the kids.
Some new rollover provisions have been introduced. Previously there were only rollover provisions for inherited land and relationship property settlements. There are now rollover provisions for transfers to Trusts, Trusts transferring to original settlors, transfers to and from LTC’s & Partnership’s as well as transfers within a company consolidated group.
Taxable Gain Calculation
In a nutshell, this is the selling price, less commission, legal fees, purchase price and cost of improvements. Holding costs such as interest are only deductible against any rental income received. The capital gain is taxed at the marginal tax rate, so for companies it is 28%, for Trusts 33%, for individuals it depends on your level of income.
Disclaimer: This blog post is of a general nature only. Please contact us for advice on your specific situation.