BDO Know How April 2016: Residential property investors; Bright Line Test.

27 April 2016

Be aware of the bright-line test, introduced for taxpayers who purchase residential properties from 1 October 2015 onwards. 

The bright-line test is designed to tax profits on residential property when it is bought and sold within the “bright-line period” (usually two years), regardless of the intention at the time of purchase.
For this test, residential property is generally land that has a house on it, or land that is zoned residential. However, your main home is exempt. If an affected property is sold for a loss, the loss is “ring-fenced” and can only be offset against similar income in the future.
The bright-line period does not generally begin until the transfer of title, which could be well after the unconditional date. However, the “bright-line date” is generally when the owner enters into an agreement to sell, and this may catch someone who owns a property for well over two years but entered into a sale agreement (conditional or unconditional) before the end of the period and the agreement becomes conditional later.
The bright-line test has removed the subjective question of a taxpayer’s intention of purchase, but this means it will also ‘catch’ those who have genuinely purchased a long term investment and have sold within two years due to a change in circumstances (perhaps outside their control). The only other available exemptions from the test relate to property that has been inherited, or which is transferred as part of a relationship property agreement.
Regardless of the new rule, property bought with the intention of resale may still fall under the existing rules – i.e. if held for more than two years, it could still be taxable.
If you would like more information on how this test might apply to your situation, please contact your local BDO office.