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Bright Line Test (2): How Do We Calculate the 2 Years?

We will continue to discuss the same topic, following the previous edition, and will analyze the same topic from different angles. We will introduce four different examples. We will focus on “How do we calculate 2 years period?” and “What is residential land?”

Example 1. Let’s assume that Sam enters into an Agreement for Sale and Purchase on 01.12.2015, resulting in a registered ownership in 01.01.2016. Then, Tom enters into an Agreement for Sale and Purchase on 01.02.2017 and will make settlement of the transaction on 01.12.2018 which will trigger the change of the ownership with the Land Information New Zealand (“LINZ”) on the same date, if the Agreement is confirmed by the purchaser of that sale agreement. Let us further assume that Sam lived in the house since he bought it last year.

The question we need to examine is whether Sam is considered to sell the property within the prescribed period of two years as defined by the Bright-line test. You will note that there are two different answers depending upon which date you count – the date of Agreement or the date of registration?

Generally speaking, where there is a registration of title is involved at the end of the transaction, the two years period starts from the date of registration of the title – 01.01.2016. This follows that Sam is likely to be considered to sell the property after two years from the date of purchase.

Example 2. Let us further assume that there is one change – Sam was not registered with LINZ after he completes the purchase of his. To avoid confusion, all the facts mentioned above remains the same. Does it make any difference?

The question comes down to, technically speaking, whether the two years period runs from the date of Agreement, not the date of the registration of the title with LINZ?

The answer is yes. Sam is considered to own the property less than two years since 01.12.2015 as he sold the same on 01.02.2017.

Does this mean that the transaction is likely to trigger a tax liability? You will remember that he lived in the property while he owned it and therefore it is likely that he is exempt from tax liability as it was used as a main home as defined in CB16 & CB16A of the Act. We will deal with this section more in detail in due course.

You will see, accordingly, that the two year period runs, generally speaking where title registration is involved, from the date of registration whereas the two year period runs from the date of the Agreement if title registration is not involved. If you attempt to sell the land without registering your name where the title is already available, this might constitute an avoidance of tax.

Example 3. Denise enters into a contract to purchase a land on 10.03.2016 and then he obtains registration of a title on 01.12.2017. There is a time gap between the date of the Agreement and the date of the registration of the title because the vendor/developer commenced the title work only after he secured sufficient number of pre-sales. We call this type of sale, speaking commonly, “sale off the plan.” Denise then enters into a contract to sell the land in January 2018 and the settlement is scheduled for May 2019.

The question is whether Denise is subject to the Bright-line test? It is unlikely because the two years period for his case runs from 10.03.2016 and the land is sold in January 2018, being less than two years.

Example 4. Let us examine another example. Henry purchased a bare land, off the plan, in December 2016. He did not build a building on the land until November 2018 and Keith approaches to him, suggesting he is interested to buy the bare land. Henry is coming to you for your advice.

You will see that two years period has not been up in full as yet. It is advisable that Henry may enter into an agreement for sale of the land in one month’s time whereby he can meet the minimum two years requirements.

Further issue? Is the land considered to be a residential land for the purpose of the Bright-line test? Residential land is defined to include a land either 1. Where there is a dwelling on it; or 2. The seller agreed to build a building on the land; or 3. The land is capable of building a residential house under the Operative District Plan of the relevant council, applicable at the time of the transaction. You will see that a bare land is likely to be considered to be a residential land for the purpose of the Bright-line test.

This article is designed to give general information to the audiences and readers of this article. This is not designed to provide a legal advice to a particular person of particular circumstance. If you have any enquiries, you should seek legal advice on that issue. A. B. Lawyers Limited does not accept any liability arising from misjudgment by the audience, without having independent legal advice on his/her case.

Should you prefer reading Korean version of this article, we encourage you to visit www.ablawyers.co.nz or www.nzkoreapost.com  and read the Korean version there.