A report back from Parliament’s Finance and Expenditure Committee on the Taxation (Annual Rates for 2021–22, GST, and Remedial Matters) Bill has recommended only minor changes to the bright-law rules, leaving a number of traps still set, says Chartered Accountants Australia and New Zealand (CA ANZ).
In a submission to the Committee in December, CA ANZ Tax Leader John Cuthbertson FCA said that who and what was captured by the bright-line rules had become too complicated, increasing the risk of non-compliance. This followed earlier commentary outlining a number of traps.
“The select committee has made some small changes to the bright-line, which we welcome, but homeowners need to be aware of the traps that remain,” said CA ANZ Tax Leader John Cuthbertson.
“If a homeowner is out of their main home for more than 12 months, for example being away on secondment, undertaking extensive renovations, or due to damage from a natural disaster, they will be exposed to the bright-line test, if sold within the bright-line period.
“In these situations, the homeowner isn’t looking to profit, so it’s a pretty harsh.”
A simple exclusion for the main home without the requirement to monitor periods of absence and the potential need for apportionment would provide much needed certainty. It would also allow for significant complexity to be removed from the current calculation of income under the bright-line rules.
“We recommended that homeowners simply be able to elect their main home, being the home which they have the most connection with, which is simple to understand, and in the traditional spirit of bright-line rules.”
“The New Zealand public needed simplicity in these revised rules, to avoid unintended outcomes and inadvertent non-compliance,” said Mr Cuthbertson.
“The whole concept of a bright line test is to provide certainty of tax position, with no ambiguity. It is a threshold test, where you’re either in or you’re out, and then you’re taxed accordingly.”
“The changes recommended by the Committee are welcomed, but they’re still at the margins, and those selling their homes need to be aware that traps still abound.”
Mr Cuthbertson commented on some of the changes proposed by the select committee.
“A little bit of leniency is provided for construction of the main home. In the situation where a new main home takes more than 12 months to build, potentially exposing the build to the bright-line, a new ‘reasonable time’ test will allow the construction period to be counted as ‘main home days’.”
“There is still ambiguity as to whether the safe harbour construction period will cover the time from when the land is purchased.”
Roll over relief, where essentially the property transfer is excluded from the bright-line, will only be available in very limited and defined circumstances. Economic ownership and effective control of the property must broadly remain unchanged.
No relief has been provided for parents and adult children who buy property together.”
Parent’s will still be subject to tax, even where no intent to profit from the transaction, if they sell their portion of the property to their children within the relevant bright-line period. This outcome is intended. Officials have stated that “to provide specific relief to individuals who can purchase residential property to on-sell to family members would be a substantial shift in policy”.
“A minor recommendation enables parents to sell down their portion of a property in stages without resetting the bright-line ‘clock’ for any remaining portion still held.”
“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.”
Additionally, a property will now qualify for the 5 year bright-line at the time of disposal if it previously had a new build on it, that was destroyed by natural disaster or fire.
“Unfortunately, despite the small changes, what we have now is still very complex, and more like a separate piece of tax legislation, rather than a traditional bright-line.”
“Homeowners and small property investors not only have to figure out whether they’re caught under the bright-line, but to what extent, and that is complicated. Ideally these rules would be easily understood by the public, but that’s not going to be the case.”
For more information contact:
Daniel Webster, Chartered Accountants Australia and New Zealand
M +64 27 282 6253
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