Update on the New Brightline Rules for Residential Rental Properties

Recently announced were proposals to change the Brightline property rules for residential property. Residential property is anything that is available for long term accommodation. It does now include Airbnb and bookabach type properties, but it doesn’t include hotels, motels, all the other things that you would think of as non-residential.

On 27 March 2021 we had a new change come through in the Income Tax Act 2007 section CB6A that changed the five-year Brightline period to a 10 year Brightline period. Any property acquired on or after that date and acquired means basically a binding contract is subject to the 10-year rule unless exempt.

Now the good news is that if you currently go and acquire a new build you will only be subject to the 5 year Brightline period and not the 10. So there is going to be a carve out not only for interest deductibility on the Brightline for new builds but also a halving of the Brightline period from 10 years to 5. In order to get that 5 year period you must acquire the new build no more than 12 months after the CCC for the property is issued and when you sell it the new build must have its CCC by that time. So of course, you could buy a property before it gets its CCC and again on-sell it before it gets its CCC. What is interesting, is that it is forcing the housing stock to have code compliance and that is different to the interest deductibility rules.
Obviously, your main home is exempt but there were also some other changes made. Firstly, if you rent your main home for a couple of years then live in it say for 5 years and then sell it that is obviously less than 10 years. When you come to sell it 2/7ths of that gain would be subject to tax. Previously under the Brightline test it would have been exempt because the house had been primarily and principally used as your residence. That majority test is gone, and it is now an apportionment. Needless to say, if it is a new build the period is 5 years as well, you sell it after that you don’t have to worry about the apportionment but otherwise if it is not a new build you will be looking at the 10 year period.

There is also a proposal to change the situation where the main home is also part rented so that the main home portion is smaller than the part that you rent out. In that scenario there will be an apportionment as well. If you rent a bedroom out to a student or someone like that or a boarder that is going to be exempt. But if you rent the majority of your house out then the Brightline test could then apply to you as well.

The other thing that is very good to note about the Brightline changes is one that will make some common sense. Currently if you want to move assets around even those that you have owned pre Brightline you could reset the Brightline period. A very good example of this in the last couple of years has been with trusts that we have wound up because of the new Trusts Act 2019, I am sure you and your clients have as well. So, the reality is the Bach down the Coromandel needs to come out from the trust and we are going to put it back in Mum and Dad’s name, probably owned in the family for 30 years and no one thinks about the Brightline test. However, by selling it out of the family trust the Brightline test restarts and if it is post 27 March 2021, it is a 10-year Brightline period. As a result, if you sell that Bach within 10 years it is going to be subject to income tax on the gain in value from 27 March 2021 or whenever you actually transferred it after that date.

There are some proposals and I think these will be tweaked a bit more so don’t get too reliant on them, but the general theme is here. There is a proposed roll over relief which is going to allow people to transfer property without triggering the Brightline rule and it will be bifurcated, a two-part test. It means the person transferring it won’t necessarily be subject to the Brightline and the person taking it over, if they are associated, will be deemed to have owned it from when the related transferor originally acquired it. This rule would work effectively as CB15 does in the Income Tax Act 2007 now. The problem with CB15 is it doesn’t apply to section CB6A, the Brightline provisions. Currently it appears what they are talking about here is some transfers to and from family trusts, look through companies and partnerships. It doesn’t look like it is going to extend to companies, but that remains to be seen. Again, this is only proposals and while we have draft law, it is at the financing select committee within parliament and it is likely that we will get some fine tuning of this as submissions are made. You have got to remember that this has been law made without consultation largely so far so there is still a lot of input to be made into it. Any changes will likely apply to transfers on / after 1 April 2022.

The only thing to be very careful of is that while all these other changes for interest and Brightline tests are applicable already post 27 March 2021 the proposal to change rollover relief will not apply until 1 April 2022 onwards. If you have got a property you want to move around, maybe you still do want to wind up the family trust, whatever you do, don’t move those properties prior to that date or you will not get the benefit of the rollover relief.

The rules are tricky, they are a little bit different to the interest deductibility rules and it is going to be necessary to make sure that we don’t get tripped up when swapping between them.

We will keep you up to date as we get more news and more refinement of the law going forward. If you would like advice around the possible impact to you and your related entities please fill out the form below.