Extended bright-line test – when does it take effect?
23rd March 2021
The Government’s bombshell announcement this morning that it will be extending the bright-line test to 10 years (currently it’s 5 years) has sent residential property investors into a tailspin.
So when exactly do the new rules take effect?
The new 10-year rule applies to residential rental properties acquired on or after 27 March 2021.
If you already own a rental, the old rules apply – ie, a 5-year bright-line test if you purchased the property from 29 March 2018, or a 2-year bright-line if you purchased the property from 1 October 2015.
If you’re in the middle of buying a residential rental property, that’s where things get a little bit complicated. Generally speaking, if you have entered into a binding contract to purchase a property before 27 March, you are within the old rules and the 5-year bright-line test applies.
Inland Revenue have published the following table outlining some scenarios as which test applies in different scenarios:
Table 1: Extended bright-line test application date examples
What bright-line test applies?
The following scenarios deal with revocable offers
|Purchaser offers on 21 March 2021, seller accepts on 24 March. Sale and purchase agreement (ASAP) signed 24 March.||5-year test applies.|
|As above, but the seller accepts the offer and signs the ASAP on 27 March.||Extended 10-year test applies.|
|Purchaser offers on 18 March 2021, seller verbally accepts on 24 March, but does not sign ASAP until 27 March.||Extended 10-year test applies (for property transactions a verbal contract is not binding, and the purchaser does not have an equitable interest in the property at that point).|
|Purchaser offers on 19 March 2021, seller counter-offers on 24 March, purchaser accepts on 25 March.||5-year test applies.|
|As above, but the purchaser accepts the counter-offer on 27 March.||Extended 10-year test applies.|
The following scenarios deal with irrevocable offers
|Purchaser submits offer as part of tender process that closes on 22 March 2021. The tender document states that the offer cannot be withdrawn until 28 March. Seller accepts offer on 27 March and ASAP is signed.||5-year test applies.
Although the purchaser acquires the land on 27 March and therefore is prima facie subject to the extended test, the carve-out for offers made on or before 23 March applies.
|Purchaser submits an offer as part of a tender process that closes on 16 March 2021. The offer cannot be withdrawn until 22 March. Purchaser does not withdraw the offer, seller accepts on 27 March and ASAP is signed.||Extended test applies.
The carve-out does not apply because the purchaser was able to revoke their offer before 27 March.
The following scenarios deal with conditional offers
|Purchaser submits an offer subject to a building report on 18 March 2021. The vendor accepts the offer and the ASAP is signed on 24 March. On 2 April, the purchaser informs the vendor that the condition is satisfied and the agreement goes unconditional.||5-year test applies.
The purchaser acquired the land when the binding agreement (subject to conditions) was entered into on 24 March, not on 2 April when the conditions were satisfied.
|As above, except the purchaser and seller agree on a reduced price on 2 April, each signing the change in the agreement.||5-year test applies. The binding agreement was entered into on 24 March, which is before 27 March.|
The Government will pass the new bright-line rules today or tonight under urgency.