Returning the Bright-line Test to 2 Years

The coalition government has officially affirmed alterations to the ‘bright line’ income tax regulations pertaining to the sale of residential land effective from 1 July 2024 onwards. Finance Minister Nicola Willis has clarified that “properties sold after 1 July 2024 will only be subject to the [bright line rules] if owned for less than two years.”

This development is positive for residential property owners; however, a degree of caution is advised concerning the amendment.

Under the existing 5 or 10-year bright line rules, broadly speaking (with considerations for a ‘main home’ exemption and other exclusions/reliefs), the profit from the sale of residential land may be taxable if the property is owned for less than either 5 or 10 years, depending on acquisition timing and whether it qualifies as ‘new build land.’ These rules may also trigger deemed taxable profit in cases of gifting or other transfers of residential land to associated parties.

The reversion to a two-year bright line period, applying the rules only to properties owned for less than two years, will significantly narrow the scope of the regulations, simplifying matters for residential property owners.

This change is especially beneficial for residential property owners contemplating the sale of a property, subject to the current 5 or 10-year bright line rules.

Unless there are compelling reasons for an earlier sale, property owners can postpone selling until after 1 July 2024, ensuring the sale falls outside the bright line rules after the two-year period has lapsed.  However, caution is warranted and key considerations include:

  • The announced change awaits formal legislation, and uncertainties regarding details, such as its application to sales based on binding agreements after 1 July 2024, remain.
  • Potential removal of current apportionment provisions in the 5 or 10-year bright line rules.
  • Retention of various ‘rollover relief’ provisions despite the shortened bright line period.

For recently acquired properties, the reinstated two-year bright line period, typically commencing upon land transfer registration, may still be relevant. Other income tax rules might apply, making property disposal profit taxable under certain conditions, such as the intention of disposal upon acquisition or involvement in a property dealing, development, or building business.

It is crucial to note that the announced bright line rule change may not be relevant for many residential property owners considering or planning a sale if:

  • The property sale falls outside the bright line rules due to ownership duration or other exclusions.
  • The property sale is taxable under other land disposal income tax rules, irrespective of the bright line rules.

If you would like to discuss in more detail and what we can offer then contact us. We’re happy to discuss this with you.

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