Bright Line rule for lifestyle, subdivision

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.