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Bright-line test extended to 5 years

Bright-line test extended to 5 years

Bright-line test extended to 5 years

Wednesday 4 April, 2018

As signalled by the Government during the 2017 election and again in February 2018, the bright-line test for tax on the disposal of residential land has now been extended to 5 years.

The Taxation (Annual Rates for 2017-18, Employment and Investment Income and Remedial Matters) Bill received Royal Assent on 29 March 2018 and the new extended 5 year period applies from that date.


The bright-line test was enacted by the previous Government in 2015 and applies to the disposal of residential land acquired after 1 October 2015.

The definition of “residential land” includes:

  • land that has a dwelling on it;
  • land for which the owner has an arrangement that relates to erecting a dwelling; or
  • bare land that may be used for erecting a dwelling under rules in the relevant operative district plan.

The definition does not include land that is:

  • used predominantly as business premises; or
  • farmland

Where residential land is disposed of within the relevant period after acquisition (e.g. 2 years) then the bright line test applies to tax any capital gain on disposal.

For the most part, land is acquired when a transfer of title is registered and disposed of when a contract is entered into for sale of the land.  However, there are some differences in acquisition dates for “off the plan” sales, subdivided land and perpetually renewable leases converted into freehold.

The application of the bright line test is subject to specific exemptions, including:

  • main dwellings (subject to restrictions);
  • transfers under a relationship property agreement; and
  • disposals by executors/administrators or by beneficiaries of an estate.


The extension of the bright line test from 2 years to 5 years will apply to residential land acquired after 29 March 2018.

The 2 year period will still apply to land acquired after 1 October 2015 but before 29 March 2018.

Other than the extension to 5 years it is business as usual in relation to the bright-line test.

However, the extension will widen the net of sales potentially subject to the bright line test.  Changes in personal and financial circumstances are more likely to occur over a 5 year period and may necessitate disposals of residential land that would otherwise have fallen out of the original 2 year period.

Property owners will need to carefully consider the implications of the new 5 year period when looking to dispose of residential land that is not subject to an exemption (e.g. investment/rental properties or holiday homes).