The idea behind the “bright-line” test is a clear rule that provides with limited exceptions (the most important one for most people relating to the sale of the family home) sales of residential property within two years of acquisition will be taxable.
However, what comprises an acquisition or a disposal is not always entirely obvious. For example, consider the common practice of signing an agreement for sale and purchase and nominating a trust to purchase.
For the purposes of the bright-line test this is an acquisition and disposal. That means that any gain on the property is subject to the bright-line test and can be taxable. Where the nomination occurs soon after the agreement has been entered into there may not be any gain. However, if the nomination occurs just prior to settlement, as is commonly the case, and the property has gone up in value then there may be a gain that will be taxable for the purposes of the bright-line test.
The following example provided by Inland Revenue from Tax Information Bulletin Vol 28, No 1, February 2016 provides the following example of the treatment of a nomination:
With a nomination there are two acquisitions and disposals of land.
Andrew acquired an interest in the land by entering into a contract to purchase on 1 January 2016 (the date he acquired the right to buy the land). When Andrew entered into a deed of nomination with Bart he transferred this interest (the right to buy the land) to Bart.
The start date for Andrew is the date he entered into the contract to purchase the land. This is because it is a sale where there is no registration. The start date is the latest date Andrew acquired an interest in the residential land. The latest date Andrew acquired an interest in the residential land is 1 January 2016 when he acquired his right to buy.
The end date for Andrew is 1 February 2016, being the date he entered into an agreement for the disposal of his interest in the land. The deed of nomination is an agreement for the disposal of the land.
As a result, Andrew is subject to the bright-line test and any gain he has made will be taxable.
Bart’s acquisition and disposal of the land will not be covered by the bright-line test. This is because the start date was on 1 March 2016 (date of registration of title) and the end date was 1 January 2019 (the date he entered into agreement to sell).
- Tax Information Bulletin Vol 28, No 1, February 2016
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