Bright-line test taxing only 3 pc

The bright-line test, brought in to discourage property speculation, only taxed about 3 per cent of residential sales during the second quarter of this year, Corelogic data shows.

Corelogic chief property economist Kelvin Davidson said the low proportion of house sales incurring the bright-line penalty didn’t necessarily mean it was failing, with evidence suggesting the number of homes ‘‘flipped’’ – bought and sold in a short period – was falling.

He said on these criteria the bright-line could be deemed a success even if the tax take from the rule was low.

With Covid-19 having pushed down interest rates and therefore returns from the likes of term deposits, Davidson said some potential sellers may have held back from selling because there was nowhere particularly attractive to park money.

The 3 per cent capture rate seen in Q2 was in line with the general trend Corelogic had observed since bright-line was brought in, Davidson said.

Under the test, if you sell a residential investment property that you have owned for less than 10 years you might have to pay income tax on the capital gain.

Owner-occupier re-sales are exempt.

With owner-occupiers out of the equation, Davidson said roughly 10-15 per cent of all investor re-sales were potentially captured by bright-line. Currently, the average time between a property being bought and sold is seven-and-a-half years.

When the test was introduced by the National government in 2015, investors only had to hold onto a property for two years to dodge the additional tax.

In March 2018, Labour increased the bright-line test to five years, and in March this year it was extended to 10 years.

Davidson said there was scope for a hump in listings in 2023 as buyers who purchased prior to the last increase passed the five-year mark, and decided to sell and pocket the gains tax free.

Davidson said it was hard to know what the effect of the 10-year bright-line might be.

‘‘If you’re a true developer, you probably just factor in extra cost and go ahead as per usual.

‘‘For someone who was originally pondering a buy and hold purchase for say five years, they may just not now purchase in the first place, so we’ll never see the effect anyway.’’