The coalition government has confirmed that the ‘bright line’ income tax rules applicable to the sale of residential land are to be changed for properties sold after 1 July 2024.

Finance Minister Nicola Willis has announced that “properties sold after 1 July 2024 will only be subject to the [bright line rules] if owned for less than two years”.

 

This is good news for residential property owners, but caution is required in relation to the change. 

 

Under current 5 or 10 year bright line rules, in very broad terms (and subject to a ‘main home’ exclusion and other exclusions/relief) profit on the sale of residential land may be taxable if the property has been owned for less than either 5 or 10 years (depending on when the property was acquired and whether or not it is ‘new build land’).  The rules can also result in deemed taxable profit on a gift or other disposal of residential land to an associated party. 

 

The return to two year bright line rules, so that the rules will only apply if a property has been owned for less than two years, will substantially reduce the reach of the rules and simplify matters for residential property owners. 

 

The change is particularly good news for a residential property owner who is considering or planning to sell a property, if the property sale would otherwise be caught by the current 5 or 10 year bright line rules.

 

Unless there are other compelling reasons to sell sooner, the property owner can defer selling until after 1 July 2024, and after the two year bright line period for the property has expired, in order to ensure that the sale is not caught by the bright line rules.

 

Caution is, however, required.  Points to keep in mind include the following:

• The change has been announced but the legislation required to effect the change has not yet been released or enacted, and the exact details of the legislation could throw up unexpected issues.  Expected, but as yet uncertain, details include:
  
  • application of the change to a property sale based on entry into a binding sale and purchase agreement (not merely unconditionality or settlement) occurring after 1 July 2024; 
  • removal of current apportionment provisions in the 5 or 10 year bright line rules that can result in the partial taxation of profit on the disposal of a main home if there has been any material period of non-main home usage (eg, leaving the property vacant or renting out the property), ie with a two year bright line period, the ‘main home’ exclusion from the rules is expected to revert to an ‘all or nothing’ exclusion; and
  • retention of various ‘rollover relief’ provisions which ensure that the bright line rules are not triggered or fully triggered by certain transactions (eg, certain transfers in and out of family trusts), despite the shortening of the bright line period. 
• If a property has been recently acquired, the reinstated two year bright line period (which generally starts upon registration of the land transfer for the acquisition) may still be relevant and will need to be taken into account.
• Other income tax rules could apply instead of the bright line rules and result in property disposal profit being taxable. For example, there are other land disposal tax rules under which profit on disposal of a property may be taxable if: 
  • the property was acquired with an intention or purpose of disposal, or the property owner or an associated person is involved in a property dealing, development or building business and the property was acquired for that business; and
  • the property disposal does not qualify for any exclusion from the relevant land disposal tax rules (such as the ‘residential exclusion’, which may only apply if certain residential use and size requirements are met and there is not a regular pattern of acquiring and disposing of residential land). 

It is also important to bear in mind that for many residential property owners considering or planning the sale of a property, the bright line rule change that has been announced will not be relevant. For example, the change may not be relevant if:

• the property sale would not otherwise be caught by the bright line rules (eg, because the duration of ownership of the property means that the bright line rules do not apply at all or the applicable bright line period has now passed, or because of the main home exclusion or rollover relief under the rules); or 
• the property sale would be taxable regardless of the bright line rules, in particular under other land disposal income tax rules. 

Get in touch

If you would like to talk to one of our tax experts regarding the bright line rules or any other property transaction tax matters, please get in touch.