Special report on the Taxation (Annual Rates for 2020–21, Feasibility Expenditure, and Remedial Matters) Act 2021
- Extending the bright-line test
- Amendments to the main home exclusion
- Treatment of short-stay accommodation
Extending the bright-line test
(Sections CB 6A, CZ 39, EL 20, FB 3A, FM 18, FO 10, FO 17, GB 52, GB 53, and YA 1 of the Income Tax Act 2007; sections 54C, 54D and 54E of the Tax Administration Act 1994)
The bright-line test has been extended from 5 years to 10 years.
Housing unaffordability is caused by a number of supply and demand-side factors. The extension to the bright-line test is part of the Government’s response to reduce investor demand for property. Decreasing the tax advantage that property investors can receive will reduce the amount investors are prepared to pay for a given house and the number of houses they will buy. The measure is intended to support first home buyers and help lift New Zealand’s home ownership rates.
Extended bright-line test (new section CB 6A)
The bright-line test, which taxes gains from residential property acquired and sold within a specified timeframe, has been extended from 5 years to 10 years. Income arising under the bright-line test is taxed at a person’s marginal income tax rate.
The other policy settings for the bright-line test remain the same, except for the changes to the main home exclusion in section CB 16A and the business premises exclusion in the definition of “residential land”, as outlined further in this special report.
Therefore, the following features of the 5-year bright-line test will continue:
- The rules that determine when the property is acquired and disposed of, and when the bright-line period is counted from.
- The definition of “residential land” covered by the bright-line test includes land that has a dwelling on it, land where the owner has an arrangement to build a dwelling on it, and bare land that may be used for erecting a dwelling under the relevant operative district plan. “Residential land” does not include farmland or land used predominantly as business premises (subject to changes to ensure property used to provide short-stay accommodation is treated as residential land and not excluded as business premises – see below).
- The current exclusions and other forms of relief will continue to apply – that is:
- the main home will continue to be excluded (subject to changes to ensure the exclusion only applies for the periods the property was used as a main home – see below),
- transfers upon death, and any subsequent disposal by the beneficiary will continue to be exempt,
- transfers under a relationship property agreement will continue to be treated as a disposal at cost, so the transferor will not be taxed under the bright-line test on any gain, and
- those who receive land under a relationship property agreement will continue to take on the bright-line start date (the date from which the bright-line period is counted) of the transferor.
- The main home exclusion is available to properties held in trust. However, people cannot use the main home exclusion for multiple properties held through trusts.
- The main home exclusion cannot be used if it has already been used twice in the two year period preceding the date of sale, and also cannot be used by a person, or group of persons, who has a regular pattern of buying and selling their main home.
- Residential land withholding tax will apply to taxable bright-line sales by anyone who is an “offshore RLWT person” (defined in section YA 1 of the Income Tax Act 2007) – in short, a vendor who is living or established outside New Zealand.
- Specific anti-avoidance rules remain, to counter companies and trusts being used to circumvent the bright-line test.
- Vendors will continue to be allowed deductions for property subject to the bright-line test according to ordinary tax rules (subject to amended deductions as a result of changes to the main home exclusion – see below).
- Losses arising from a sale under the bright-line test will remain ring-fenced so they may only be used to offset taxable gains from other land sales.
The extended bright-line test applies if a person has acquired an estate or interest in the land on or after 27 March.
When an estate or interest in land is acquired
In a typical land purchase, the purchaser will first acquire an interest in the land when a binding contract to purchase the land is formed (even if some conditions – like getting finance or a building report – still need to be met). There is further discussion of when land is acquired in QB 17/02.
While the date a person acquires property determines whether the 5-year or 10-year bright-line applies, it should be noted that the 5 or 10-year period is then typically counted from the date the land is transferred to the purchaser (generally the settlement date).
Irrevocable offer carve-out
The 10-year bright-line test does not apply to property acquired on or after 27 March as a result of an offer made by the purchaser on or before 23 March 2021, provided the offer could not be revoked before 27 March 2021.
An irrevocable offer is one that cannot be withdrawn before a certain time. For example, it is common as part of the tender process to sign a tender document that states the person cannot withdraw their offer until 5 working days after the tender has closed.
Table 1 outlines some scenarios and whether the 5-year or 10-year bright-line applies.
|Example||What bright-line test applies?|
|The following scenarios deal with revocable offers|
|Purchaser offers on 21 March 2021, seller accepts on 24 March. Sale and purchase agreement (ASAP) signed 24 March.||5-year test applies.|
|As above, but the seller accepts the offer and signs the ASAP on 27 March.||Extended 10-year test applies.|
|Purchaser offers on 18 March 2021, seller verbally accepts on 24 March, but does not sign ASAP until 27 March.||Extended 10-year test applies (for property transactions a verbal contract is not binding, and the purchaser does not have an equitable interest in the property at that point).|
|Purchaser offers on 19 March 2021, seller counter-offers on 24 March, purchaser accepts on 25 March.||5-year test applies.|
|As above, but the purchaser accepts the counter-offer on 27 March.||Extended 10-year test applies.|
|The following scenarios deal with irrevocable offers|
|Purchaser submits offer as part of tender process that closes on 22 March 2021. The tender document states that the offer cannot be withdrawn until 28 March. Seller accepts offer on 27 March and ASAP is signed.||
5-year test applies.
Although the purchaser acquires the land on 27 March and therefore is prima facie subject to the extended test, the carve-out for offers made on or before 23 March applies.
|Purchaser submits an offer as part of a tender process that closes on 16 March 2021. The offer cannot be withdrawn until 22 March. Purchaser does not withdraw the offer, seller accepts on 27 March and ASAP is signed.||
Extended test applies.
The carve-out does not apply because the purchaser was able to revoke their offer before 27 March.
|The following scenarios deal with conditional offers|
|Purchaser submits an offer subject to a building report on 18 March 2021. The vendor accepts the offer and the ASAP is signed on 24 March. On 2 April, the purchaser informs the vendor that the condition is satisfied and the agreement goes unconditional.||
5-year test applies.
The purchaser acquired the land when the binding agreement (subject to conditions) was entered into on 24 March, not on 2 April when the conditions were satisfied.
|As above, except the purchaser and seller agree on a reduced price on 2 April, each signing the change in the agreement.||5-year test applies. The binding agreement was entered into on 24 March, which is before 27 March.|
Where a sale and purchase agreement has been entered into before 27 March but the purchaser is “and/or nominee”, then that person must have been nominated before 27 March to remain subject to the 5-year bright-line test, otherwise they will be subject to the 10-year test. This is because the nominee does not obtain an “estate or interest” in the land until they have been nominated as purchaser.
Example 1: Trust nominated as purchaser
Melissa’s offer on a property is signed and accepted on 26 March 2021. She lists the purchaser as herself “and/or nominee”. She intends for the property to be owned by her family trust, which is yet to be set up. She sets up the family trust and nominates the trustees as the purchaser on 1 April. Because the nomination is made on 1 April (after 26 March) the property is subject to the 10-year bright-line test.
Example 2: Additional purchaser added as nominee
James’s offer on a property is signed and accepted on 26 March 2021. He lists the purchaser as himself “and/or nominee”. He intends to purchase the property with his brother Will, but Will wasn’t available to sign the agreement when he put the offer in. James nominates Will as the other owner of the property on 28 March 2021. Because Will is nominated after 26 March 2021, he will be subject to the 10-year bright-line test for his share of the property. James will be subject to the 5-year test for his share.
The 5-year bright-line test (section CZ 39)
The 5-year bright-line test continues to apply in limited circumstances to residential land acquired on or after:
- 29 March 2018 but before 27 March 2021,
- 27 March 2021 as a result of an offer made by the purchaser on or before 23 March 2021, if the offer could not be revoked before 27 March 2021.
The income charging provision for the 5-year bright-line test has been shifted from section CB 6A to section CZ 39.
The main home exclusion that applies for the purposes of the 5-year test has been shifted from section CB 16A to section CZ 40.
Residential land withholding tax
(Section RL 1 of the Income Tax Act 2007 (ITA) and sections 54C–54E of the Tax Administration Act 1994 (TAA))
Residential land withholding tax (RLWT) applies to sales of residential land made by an “offshore RLWT person” if the sale occurs within five years. This is provided for in section RL 1 of the ITA and section 54C of the TAA.
With the extension of the bright-line test from five years to ten years, sections RL 1 and 54C have been updated so that RLWT also applies to sales of residential land made within ten years of acquisition (where the 10-year bright-line test is relevant).
Section RL 1(2)(a) has been amended to include references to new sections CZ 39 and CZ 40, so that a five-year test is still relevant for properties acquired before the application date of the 10-year test.
Section 54E of the TAA provides that the Commissioner is able to issue an RLWT exemption certificate in limited circumstances – including where a seller is in the business of developing land, dividing land into lots, or erecting buildings; and where the property was the seller’s main home.
RLWT exemption certificates will continue to be available where a property is used as a main home:
- For properties acquired before 27 March 2021 (or subject to the irrevocable offer carve-out), this is where it was the owner’s main home for more than 50 percent of the bright-line period (new section CZ 40).
- For properties acquired on or after 27 March 2021 (excluding where the irrevocable offer carve-out applies), this is where it is used as the owner’s main home for the whole bright-line period, including days within the 12-month buffer that are counted as main home days (provided for in new section CB 16A).
Section 54E of the TAA has been amended to refer to both section CB 16A and new section CZ 40 of the ITA (that is, both versions of the main home exclusion).
Where RLWT has been withheld, section 54D of the TAA and section RL 6 of the ITA permit a taxpayer to file a form for their land transactions to obtain a refund if too much RLWT has been paid relative to their overall income tax liability for their land transactions. Section 54D has been amended to refer to both CB 16A and new CZ 40.
Amendments to the main home exclusion
(Sections CB 6A, CB 16A, CZ 40, DB 23C and YA 1 of the Income Tax Act 2007)
The “main home exclusion” from the bright-line test has been amended so that it no longer applies on an all or nothing basis, but rather applies only for the period the property is actually used as the owner’s main home. A 12-month buffer applies to allow the property to not be used as a main home for up to 12 months without tax implications.
A person’s main home is not taxed under the bright-line test. Prior to this amendment, a property was either fully in or fully out of the main home exclusion. For example, a person could qualify for the main home exclusion where the property was rented out for some of the time it is owned, provided it was used as the owner’s main home for more than 50 percent of the bright-line period. This all-or-nothing approach made sense in the context of a shorter bright-line period. However, it is not appropriate with a longer bright-line test as much more income could be involved. For example, without any changes to the way the main home exclusion works, a person would not have to pay tax under the bright-line test for a property that was rented out for four years if it was used as the taxpayer’s main home for five years.
- The main home exclusion has been amended so that it no longer applies on an all or nothing basis. Instead, it only applies for the period(s) the property is actually used as the taxpayer’s main home. To be within the exclusion, there is still a requirement that the property has been used predominantly (on a floor area basis) as the taxpayer’s main home.
- The legislation provides that a property is excluded from the bright-line test if it is the owner’s main home for the full bright-line period. Days when the property is not used as the main home will be treated as main home days if:
- the non-main home days are in a period of non-main home days of 365 days or less (the counted period), and
- the counted period is immediately before or after a period where the property is the person’s main home.
The effect of this is that there is a 12-month buffer, within which a change of use of a property to or from being the taxpayer’s main home does not need to be accounted for. In other words, the main home exclusion still applies if the property was not used as a main home for periods up to 12 months at a time. If the period that the property was not used as a main home exceeds 12-months, the main home exclusion does not apply.
- If the full main home exclusion in new section CB 16A does not apply, the amount the person derives from selling the property is income under section CB 6A. However, if the property has been used as the main home for some of the time it was owned, the legislation provides that the taxpayer is required to pay tax only for periods where the property was not used as their main home, or not counted as their main home. Periods of 12-months or less that are within the buffer discussed above, where the property is not used as a main home, are counted as main home days for the purposes of the calculation. The legislation provides for this as follows:
- New section CB 6A(6) provides that if the person has excluded days (that is, main home days) in the bright-line period, the amount of income the person derives from disposing of the land is reduced by reference to the formula in section CB 6A(7).
- New section CB 6A(7) provides that the person’s income is reduced by the amount calculated by subtracting the value attributable to the period the property was used as a main home or counted as a main home (that is, the proportion of days the property was used/counted as a main home multiplied by the sale price) from the sale price. This ensures that the taxpayer only has income attributable to the days the property was not their main home (or counted as their main home).
- New section DB 23C reduces the deduction the taxpayer can claim for the cost of the property (which includes the acquisition cost and any capital improvements). The deduction is reduced in proportion to the time the property was used (or counted as) as the main home. This ensures the proportion of the cost of the property that is deductible reflects the extent to which the property was not used as the main home (as this is the period in respect of which the gain is taxed).
The amended main home exclusion applies to property subject to the 10-year bright-line test, that is, property acquired on or after 27 March 2021. However, it does not apply to property acquired on or after 27 March 2021 as a result of an offer made by the purchaser on or before 23 March 2021, provided the offer could not be revoked before 27 March 2021. The existing main home exclusion continues to apply for such properties, as well as properties acquired before 27 March 2021.
Main home exclusion (new section CB 16A)
The main home exclusion has been amended so that it no longer applies on an all-or-nothing basis in relation to residential land acquired on or after 27 March 2021 (subject to the carve-out for irrevocable offers). The existing main home exclusion continues to apply to properties acquired before 27 March (or after that date but subject to the irrevocable offer carve-out). This has been shifted to new section CZ 40. Table 2 outlines the previous law and the new law.
|Previous law||New law|
|CB 16A: Section CB 6A does not apply to a person who disposes of residential land if, for most of the period [the bright-line period], the land has been used predominantly for a dwelling that was the main home for the person…||New section CB 16A: Section CB 6A does not apply to a person who disposes of residential land if, for all of the days [in the bright-line period], the land has been used predominantly for a dwelling that was the main home for the person…|
Section YA 1 definition of main home: means, for a person, the one dwelling –
(a) That is mainly used as a residence by the person….
Section YA 1 definition of main home: means, for a person, the one dwelling –
(a) That is used as a residence by the person…
Example 3: Main home exclusion
William purchased a property in 2023. He lived in it for five years and rented it for four years before selling it in 2032.
William would qualify for the main home exclusion if the current settings for the exclusion were not changed because for most of the bright-line period (that is, more than 50 percent) the house was used as William’s main home. As a result, previous section CB 6A would not apply and William would have no tax to pay (though other aspects of the land sale rules, including the intention test, may still apply).
Under the change, the main home exclusion does not apply as it was not William’s main home for the full bright-line period. Instead, William is subject to section CB 6A, but his income is reduced to reflect the period for which the property was used as his main home (see quantification section below).
Example 4: Main home exclusion
Erica purchased a property in 2022. She lived in it with a flatmate until she sold it in 2027.
Under both the previous and current law, the main home exclusion would apply. This is because for all of the bright-line period the property was used predominantly as Erica’s main home. The “predominantly” test looks at whether, on a floor area basis, the property was used at least 50 percent as the person’s main home.
12-month buffer (new section CB 16A(6))
Despite the requirement that the property must be used as the person’s main home for “all of the days” in the bright-line period, a 12-month buffer applies under which any period of up to 12 months that the property is not used as the person’s main home is counted as a main home period, provided the period is immediately before or after a period during which the property was used as their main home. Therefore, the property will still qualify as the person’s main home if it was vacant or rented out for a period of less than 12 months before or after main home use.
This is intended to provide leeway for moving in or out of a property (for example, there may be vacant periods between settlement and moving in, or between moving out and sale). It also covers periods of up to 12 months where the taxpayer is not using the property as their main home (for example, if they rented the property out while overseas and it was no longer their main home for that period).
If a period of non-main home use exceeds 12 months, the entire period for which the property was not used as a main home is subject to tax.
If the main home exclusion does not apply to take the property completely outside the bright-line test (that is, because there was a non-main home period that exceeded 12 months), any non-main home period exceeding 12 months will need to be taken into account in working out a taxpayer’s income. See quantification section below.
Example 5: 12-month buffer does not apply
Catherine purchased her home in 2023. She lived in it until she went on her OE from 2025 to 2027. When she returned, she lived in her home again until she sold it in 2030.
The 12-month buffer does not apply here as the single period that the property was not used as Catherine’s main home (2025 to 2027) exceeds 12 months. As a result, the main home exclusion does not apply and Catherine must calculate her income under section CB 6A(6) (see quantification section below).
Example 6: 12-month buffer applies
Gerald purchased his home in January 2022. He did not move in until six months later as he was overseas. He sold the property in 2026.
The 12-month buffer applies as the period Gerald was overseas and not using the property as his main home was less than 12 months, and it was immediately followed by a period where Gerald used the property as his main home. Therefore, the main home exclusion applies despite Gerald not actually using the property as his main home for a 6-month period.
Example 7: 12-month buffer applies
Deb and Greg are retired and live in Dunedin. They acquired the property in March 2022 and sold it in January 2031. Every year they go to Brisbane for 3 months over winter. While they are in Brisbane, they stay in an apartment that they own.
Deb and Greg’s Dunedin property is likely to be their main home – as they typically live there, it is likely the home with which they have the greatest connection. When someone has two homes, the particular facts and circumstances need to be considered to determine which one they have the greatest connection with. This would include considering factors such as the extent to which they live in each property, and their family, social, employment and other ties to each of the locations. Regardless, in Deb and Greg’s situation, if the Dunedin property was not considered their main home when they are in Brisbane, the 12-month buffer would apply for the periods they are in Brisbane (as each period is less than 12 months). Therefore, either way the main home exclusion applies and Deb and Greg do not need to pay any tax on the sale.
Quantification (new section CB 6A(6))
New section CB 6A(6) applies if a person has used their property as their main home for some but not all of the time it is held. Under section CB 6A(6), the person’s income from the disposal of the property is reduced by the excluded adjustment amount that is the amount calculated under subsection (7):
Income from disposal − excluded adjustment amount
This formula only needs to be used if the property is used as the person’s main home for some of the time it is owned. If the property is never used as the person’s main home, the person’s income from disposal is simply the amount they derive from disposing of the property. They are not required to apply the formula as it does not impact them.
Quantification formula (CB 6A(7) to (11))
The formula for the excluded adjustment amount in section CB 6A(7) is:
(Adjustment days / Total days) × Unadjusted amount
Adjustment days is the total number of days during the bright-line period where the property was used as a main home. It also includes days that are counted as main home days because the 12-month buffer applies.
Total days is the total number of days in the bright-line period.
Unadjusted amount is the amount of income the person derived from disposing of the property.
The effect of this formula is to evenly apportion the sale proceeds from the property over the period it is held. The amount attributable to the period the property was not used as the taxpayer’s main home then becomes income for tax purposes. There is no option to pay tax based on the actual valuations of the property at the start and end of the period the property was not the taxpayer’s main home. The following examples illustrate how the formula works:
Example 8: Apportionment following change of use
Everly bought a property for $1 million. It was transferred to her on 13 March 2030. She sold the property on 31 December 2037 for $1.8 million. She lived in the property and it was her main home from 13 March 2030 until 28 June 2035. Everly then rented it out until 31 December 2037. Her income is calculated as follows:
Excluded adjustment amount in subsection (7):
(1,934 / 2,851) × $1.8 million = $1,221,045.25
Under subsection (6):
$1.8 million − $1,221,045.25 = $578,954.75
Therefore $578,954.75 is Everly’s gross income from the sale. A portion of the acquisition cost needs to be deducted to determine the net amount of income from the sale that is subject to tax (see below).
Example 9: Apportionment and the 12-month buffer
Shanti bought a property for $700,000. It was transferred to her on 20 May 2025. She lived in it from then until 2027, when she went overseas for nine months. While Shanti was overseas, the property was not her main home. When she returned, she lived in the property until 22 March 2029. Tenants moved in a few weeks later and Shanti rented the property out until 9 November 2033 when she sold it for $1 million.
The days in the 9-month period when Shanti went overseas are counted as “main home” days, even though the full main home exclusion does not apply to her because she exceeded the 12-month buffer period when she no longer used the property as her main home (from the day after she moved out (23 March 2029) until the date she sold the property – 9 November 2033).
The total number of days between 20 May 2025 and 9 November 2033 (inclusive) is 3,096. Her main home days total 1,403 (between 20 May 2025 and 22 March 2029, inclusive). For the purposes of the formula, total days is 3,096 and adjustment days is 1,403. The unadjusted amount (the amount derived on the sale) is $1 million.
Shanti’s bright-line income is calculated as follows:
Excluded adjustment amount:
(1,403 / 3,096) × $1 million = $453,165.37
Gross income from the sale per CB 6A(6):
$1 million − $453,165.37 = $546,834.63
Shanti’s gross income from the sale is $546,834.63. A portion of Shanti’s acquisition cost needs to be deducted to determine the net amount of income subject to tax (see below).
Cost of some residential land reduced (DB 23C)
A person can claim a deduction under section DB 23 for the cost of property subject to the bright-line test.
Where new section CB 6A(6) applies, new section DB 23C reduces the deduction that can be claimed under section DB 23 as follows:
Excluded adjustment amount = (Adjustment days / total days) × cost
Adjustment days and total days have the same meaning as in CB 6A. Cost means the cost of the residential land.
Example 8 continued: Cost of residential land reduced
Continuing with Example 6 (Everly), Everly bought the residential land for $1 million, and it was transferred to her on 13 March 2030. Her total days is 2,851 and her adjustment days is 1,934.
Using the formula in section DB 23C(2), Everly’s excluded adjustment amount is:
(1,934 / 2,851) × $1 million = $678,358.47
Under DB 23C(1), Everly’s deduction for the cost of revenue account property under section DB 23 will be:
$1 million − $678,358.47 = $321,641.53
Combined impact of sections CB 6A and DB 23C
The Income Tax Act 2007 operates on a gross basis and the structure of income charging and deduction provisions in different subparts does not allow for the provision of one single mathematical formula. However, it is possible to mathematically simplify the formula as follows:
(disposal price − cost of the property) × ((total days − adjustment days) / total days)
Example 8 continued: Combined effect of CB 6A and DB 23C
Continuing with Example 6 (Everly), Everly’s income under section CB 6A is $578,954.75 and her deduction for the cost of revenue account property under section DB 23 (and DB 23C) is $321,641.53. Her net income from the sale is therefore:
$578,954.75 − $321,641.53 = $257,313.22
Everly would therefore pay tax at her marginal rate on $257,313.22.
Alternatively, using the mathematically simplified formula from above and the original information from Example 6:
($1,800,000-$1,000,000) × ((2,851 − 1,934) / 2,851)
= $800,000 × (917 / 2,851)
Treatment of short-stay accommodation
(Section YA 1 of the Income Tax Act 2007)
The “business premises exclusion” from the definition of “residential land” has been amended to ensure that residential property used to provide short-stay accommodation, where the accommodation is provided in a dwelling that is not the owner’s main home, is subject to the bright-line test. The amendment also ensures short-stay accommodation is subject to the residential rental deduction ring-fencing rules in subpart EL of the Act.
The bright-line test and residential rental deduction ring-fencing rules apply to “residential land” as defined in section YA 1. The previous definition of “residential land” had a carve out for land used predominately as business premises. Because there was no qualification to this carve out, residential property used to provide short-stay accommodation via predominantly digital platforms as part of the sharing economy was potentially able to qualify for the business premises exclusion and therefore be out of scope of the bright-line test and residential rental deduction ring-fencing rules. This was not intended.
Bright-line changes (paragraph (b) of the definition of “residential land”)
The definition of “residential land” has been amended to include land with a dwelling on it if it is used predominantly for a business of supplying accommodation and the dwelling is not the main home of the owner.
This is intended to ensure the bright-line test applies to short-stay accommodation properties (including a property that is rented out as part of the sharing economy on digital platforms, or a bach that is sometimes rented out when the owner does not use it) unless it is an accommodation facility that is also the owner’s main home and they rent out rooms for short-stay accommodation such as a bed and breakfast. This ensures that the treatment is the same between a person who rents out a property on a long-term basis (that is, has tenants) and a person who rents out a property on a short-term basis – that is, both are subject to the bright-line test. The carve-out for bed and breakfast type properties that are the owner’s main home ensure they are treated the same as a homeowner who rents spare rooms to flatmates – that is, neither are subject to the bright-line test. This is necessary because in a bed and breakfast situation the property may not be used predominantly as the owner’s main home.
Residential rental deduction ring-fencing (paragraph (b) of the definition of “residential land”)
The amendment to the definition of “residential land” discussed above also ensures that residential properties used to provide short-stay accommodation are subject to the residential rental deduction ring-fencing rules.
Hotels, motels and other commercial accommodation
Hotels, motels and other similar commercial accommodation are not “residential land” and are therefore not subject to the bright-line test or the residential rental deduction ring-fencing rules. This is because they are specifically excluded from the definition of “dwelling” in the Income Tax Act.