Withers Tsang


Key News and Insights


The better informed our clients are, the easier it is to make great decisions together.

Check this page regularly for news and articles on property related matters, changes in legislation or taxation that applies to SME’s, articles and presentations from our partners, plus other tips, articles, seminars and events that could impact you, your investments or your business.

We keep you up to date, so we can plan better, together.


Part 2 – Five Year Bright-line Test – Exemptions and how they apply.


Following on from last month’s article, the article this month focuses on some of the exemptions applicable under the Bright-line test.

Definition of Residential Land & Exemptions

It is important to understand for the purposes of the Bright-line test, what residential land is defined as being.

Residential Land is land that:

  • Has a dwelling on it, or

  • The seller of the land is party to an arrangement that relates to erecting a dwelling on it, or

  • Is bare land that may be used for erecting a dwelling under the rules in the relevant district plan.

  • It does not include land, (even if it satisfies one of the first three requirements), if it is used predominately for business premises.

  • It does not include farmland. 

This definition is important to understand as the bright-line test only applies to land that is residential land at the time of disposal. The characteristics of land can change over time depending on how it is being used. For example, taking the exemption for Farmland, a taxpayer may have purchased what they initially considered to be farmland. However, land is not farmland unless it is being worked as a farming or agricultural business, or is suitable to be worked as such. Inland Revenue have signaled in their guidance documents that a lifestyle block that is being used to graze a few sheep would not be sufficient to satisfy the land being classified as farmland. They have also indicated that a fifty-hectare block covered in gorse would also not satisfactorily be classified as farmland as it is not currently capable of being farmed.[1] The characteristics of land can also alter due to changes made by Councils to the district plans. 

It is just as important to understand how the exemption for Business Premises applies. The exemption applies not just to the owner using the buildings on the land in the course of their business, but also if they are leased to third party to be used as business premises in the course of their business.

The important aspect is that for the exemption to apply, the building on the land must be utilised as business premises. To support this the Inland Revenue have given the example of a taxpayer purchasing an empty factory which they intend to develop into an apartment building[2].  Ignoring any other taxing provisions that may apply to this tax payer, if sold within the five-year period, even without any development undertaken, the bright line rules will still apply. This is because the taxpayer had a plan to build the apartment building which satisfied the residential land definition and the factory was vacant at the time of sale so the business premise exemption did not apply.

Main Home Exemption

For the main home exemption to apply the land must have been used predominantly as the main home of the owner. To be able to apply this exemption, the owner of the property must have used the property as their main home for more than 50% of the time they have owned the property. Care needs to be taken if the property has previously been a residential rental property that the owner has moved into, especially if it has been tenanted for more than 50% of the time owned. It is not enough for the property to be occupied by a family member, it must be occupied by the owner. 

Nor can the main home exemption be used if the land has multiple dwellings, of which the owner is only utilising one as their main home. An example of this would be a block of flats, where the owner utilises one as their main home and rents out the others. 

Main home Exemption - Trusts

The main home exemption can also apply to properties owned by trusts in limited circumstances. For the main home exemption to apply to a trust, the property needs to have been the main home of a beneficiary of the trust, and the principal settlor of the trust does not have another main home.

A principal settlor is a person who has transferred the most value to the trust.

Basically, what this means, is that the main home exemption is only available if the property sold is the main home of a person who is the principal settlor and also beneficiary.  Where this causes problems is when beneficiaries, i.e. children utilise the trust property as their main home and it is the parents who are the principal settlors who have a different property as their main home. 

Now that the bright line period has been extended from two to five years, it is likely that more taxpayers are going to be caught as the characteristics of the land that they are holding changes due to the passing of time, district plan changes or change in their personal circumstances.

In next month’s article we continue our review of the other exemptions that apply to the bright-line rules.  In the meantime, if you have concerns on how the bright-line rule impact on you, feel free to contact Withers Tsang and talk to one of our experts.

Download this article here

[1] Examples taken from Tax Information Bulletin 281-115 Vol 28, No1, February2016 at 83

Also published at http:/www.ird.govt.nz.technical-tax/legislation/2015-111-ta-bright-line.html

[2] Example Taken from Tax Information Bulletin 281-115 Vol 25, No 1, February 2016 at 83.

Also published at http:/www.ird.govt.nz.technical-tax/legislation/2015-111-ta-bright-line.html