Bright Line rule for life­style, sub­di­vi­sion

CHB Mail - - Property Brokers - GREG NEILL Part­ner, Tax Ad­vi­sory Crowe Hor­wath

In­land Rev­enue has re­cently is­sued two draft state­ments re­gard­ing the ap­pli­ca­tion of the “bright line” rule to the sale of a life­style block and the sale of a sub­di­vided sec­tion.

The gen­eral prin­ci­ple of the bright line rule is that any gain on the sale of res­i­den­tial land within five years of ac­qui­si­tion is sub­ject to tax. This is sub­ject to cer­tain ex­cep­tions in­clud­ing the sale of a per­son’s main home. The In­land Rev­enue state­ments pro­vide fur­ther ev­i­dence that, while the bright line rule is sim­ple in con­cep­tual terms, the ap­pli­ca­tion of the rule in prac­tice is of­ten more com­pli­cated.

The first draft state­ment on life­style blocks con­sid­ers when the sale of a life­style block may be ex­cluded from be­ing taxed un­der the bright line rule.It may be ex­cluded if it is con­sid­ered farm­land or the seller’s main home.

The land needs to be worked in the farm­ing or agri­cul­tural busi­ness of the owner or oth­er­wise be ca­pa­ble of be­ing worked be­cause of its area and na­ture. The state­ment notes that life­style blocks will not gen­er­ally qual­ify as farm­land. In ad­di­tion, a life­style block that re­quires sig­nif­i­cant in­vest­ment or mod­i­fi­ca­tion to be used in the pro­posed farm­ing or agri­cul­tural busi­ness will not qual­ify.

The main home is not lim­ited to the land on which the dwelling is si­t­u­ated and the sur­round­ing cur­tilage. It can in­clude other ar­eas the seller uses fre­quently or cus­tom­ar­ily in con­nec­tion with the dwelling. For ex­am­ple, land used for hobby farm­ing and ar­eas for grow­ing food for do­mes­tic use.

The sec­ond draft state­ment on sub­di­vided sec­tions con­cludes that it is pos­si­ble for the main home ex­clu­sion to ap­ply to a sec­tion even where that sec­tion does not have a dwelling on it.

How­ever, it will be nec­es­sary for the seller to il­lus­trate that the sec­tion be­ing sold was used pre­dom­i­nantly for a dwelling that was the seller’s main home and that it was used in that man­ner for greater than 50 per cent of the own­er­ship pe­riod. There­fore, the com­mon sce­nario of a seller sub­di­vid­ing off a sec­tion from their back­yard should qual­ify.

The dead­line for mak­ing sub­mis­sions on the two state­ments is 12 Oc­to­ber 2018 and it will be in­ter­est­ing to see whether any sub­stan­tive amend­ments are made to the fi­nalised ver­sions.

If you would like to know how the ap­pli­ca­tion of the bright line or these state­ments may af­fect your prop­erty, please con­tact one of the team at Crowe Hor­wath.

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