- Residing away from your main home for more than 12 months brings you under the change of use rule
- Those taxpayers who are likely to exceed 12 months will need to keep accurate records
- Change of use apportionment is incurred in the year of sale and taxed together with other income
Change of use rule and the 12-month bright-line 'buffer'
The recent bright-line test changes are accompanied by a change of use rule which will affect the way tax is calculated if the property was not used as the owner’s main home for more than 12 months at a time within the applicable bright-line period. The change of use rule will apply to properties captured by the 10 year bright-line test and the five year 'new build' test.
Where the owners of a residential property reside somewhere other than the main home property for less than 12 months, they do not need to count that time as a change of use. Instead those days are treated as if they are main home days. This 12-month period can be viewed as a ‘safe harbour’ intended to provide leeway for homeowners moving between properties, or where work commitments may require you to be away from home.
If the owner is subject to the change of use rule, they will be required to pay income tax at the time the property is sold on a pro-rata basis for the time the property was not the main home.
A small safe harbour
The change of use mechanism is likely to catch more home owners unawares than the test used for the earlier 5 year bright-line test (a predominant use test). For periods of more than 12 months where the property is not your main home, an apportionment calculation is required – this is based on days, not months, that the property was not your main home.
Surpassing the 12-month buffer is relatively easy to do. For example, if a person buys a plot of land, and over the next 18 months their home is designed, built and code of compliance issued on the site. The taxpayer’s bright-line period commenced when they purchased the land and have a change of use event before they have even begun to live in the property. This is by no means the only scenario. If you’ve joined our Tax Team at one of this year’s Tax Update Roadshow sessions, you will have heard the team discuss when a secondment runs longer than expected or when renovations are required prior to sale, but there are many more.
But there’s a catch (or two)
For many years, salary and wage-earning taxpayers in New Zealand have had to keep very few records for tax purposes. Taxpayers who realistically expect to be away from the property for more than 12 months will now need to keep records of the precise number of days living away from the property. While this is a compliance burden, working retrospectively carries a big risk - a day’s miscalculation could result in a hefty tax bill.
Which brings us to the biggest concern for taxpayers. The tax liability. If a change of use apportionment is required, it’s incurred in the income tax year in which you sell the property and taxed together with other income at your marginal tax rates.
While limited deductions at the time of sale may be allowed (based on the fact sheets released at the time of the bright-line announcements) record keeping for taxpayers will be paramount.
CA ANZ members and Inland Revenue will have a long road of taxpayer education ahead to ensure taxpayers aren’t unfairly impacted by these new rules.