Despite select committee tweaks, the brightline tax extension will remain a minefield for property owners and could deter parents from helping their children get onto the property ladder, tax experts say.

Introduced by the National government in 2015 to discourage speculative house ‘flipping’, the brightline initially clipped a tax on any gains from a property sold within two years of its purchase.

That was extended to five years in 2018 with the Ardern-led government announcing last year it would extend that to 10 years for properties bought after March 27.

That came alongside a raft of interventions, including removing interest deductibility and increasing the loan-cap ratio for property investors to 40%. 

New builds will remain at the five-year threshold.

The Labour government has strenuously denied it's a capital gains tax because it applies exclusively to residential properties and it's only over a specific time period.

But John Cuthbertson, tax lead at Chartered Accountants and New Zealand (CAANZ), said recommended changes by parliament’s finance and expenditure committee to the tax law still left several "traps".

Cuthbertson said the definition of ‘who and what’ is captured by the brightline rules remained too complicated, increasing the risk of non-compliance even for people with one home. 

And under brightline rules, parents who’ve co-invested in a home to help their children get into their first property will be on the hook for tax if they sell their portion to their children within the relevant period.

National party MP and shadow treasurer Andrew Bayly thinks clipping a tax onto parents is unfair as well as counterproductive to the purpose of the tax rule, which is to provide an equal playing field for first home buyers.

Tighter lending

“The bank of mum and dad has always been a way to get into your first home, helping fund a deposit or co-buying the house, and what brightline has done is make it much harder for them to help them."

Bayly said in the case where a parent may go 50/50 on a deposit with their child, and then five years later sells their share, the parent is on the hook for the capital gains. 

One of the select committee recommendations is not to reset the child's brightline period to zero after that transaction, as it currently stands.

The other option, a loan, also became problematic under the tough Credit Contracts and Consumer Finance Act (CCCFA).

“Banks now ask for your liabilities and what they’ll see is a loan from mum and dad, so you’re now a bigger risk, and your financial position isn’t as attractive.”

CAANZ’s Cuthbertson is also concerned about the complexity of the ‘change of use’ rule for properties, where homeowners become subject to the brightline tax if they are away from their main home for a continuous 365 days or more, and the home is then sold within that decade long timeframe.

This includes being away on work secondment, or even undertaking renovations or extensions that take longer than a year.

Cuthbertson said in these situations, the homeowner isn’t looking to profit, “so the outcome could be quite harsh.” 

CAANZ has recommended a simple exclusion for the main home, removing the requirement to monitor periods of absence and the potential need for “apportionment”.

As it stands homeowners need to keep records of the precise number of days living away from the property, as the number of days longer than 365 becomes a taxable period, and is added to other income sources for the year.

Things change

Cuthbertson said in some cases, that could easily push the owner into another tax band.

Bayly said 10 years was a long time. “Circumstances change. Kiwis change homes roughly about every five years, about half of people get divorced and people have health or life events."

He said government, military and diplomatic services will be some of the worst affected, with postings overseas – and that puts them on the hook for the tax rules.

Cuthbertson said simply being able to elect their main home, being the home with which they have the most connection with, is simple to understand and more in the "traditional spirit of brightline rules”.

He said while the select committee did provide some leniency on the construction timeline for the main home, particularly in light of the longer build timeframes currently, there is still ambiguity as to whether the construction period will cover the time from when the land itself is purchased.

“Some good news is that leaky buildings which are substantively reclad or earthquake-prone buildings that are remediated will qualify as new builds and be subject to a 5-year bright-line, not a 10 year.”