Terry Baucher asks if the 'bright-line test' is an example of 'enact in haste, repent at leisure'

Terry Baucher asks if the 'bright-line test' is an example of 'enact in haste, repent at leisure'

By Terry Baucher

“We do not believe that the introduction of a bright-line test for residential land is sound tax policy.”

That was the Chartered Accountants Australia and New Zealand’s (“CAANZ”) opening sentence in their submission  to Parliament’s Finance and Expenditure Committee regarding the Taxation (Bright-line Test for Residential Land) Bill (“the Bright-line Bill”). 

The introduction of the bright-line test was one of the bigger surprises in this year’s Budget. At first sight it would appear to be a welcome move, given the IRD’s Policy Advice Division advised the Tax Working Group in 2009 that the tax treatment of capital gains is “inconsistent… lacks an overall coherence and creates uncertainty”. The speculative behaviour the bright-line test seeks to address is a reflection of this overall incoherence and uncertainty. 

The Bright-line Bill’s objectives were set out in paragraph 13 of the accompanying Regulatory Impact Statement as being:

  1. Provide an easier rule for Inland Revenue to enforce to target short-term speculation in residential property;
  2. Minimise the number of sales made taxable that were acquired without an intention of resale;
  3. Minimise compliance costs for taxpayers in complying with the bright-line test.

These seem laudable objectives, so, I was surprised to see the level of opposition to the measure from CAANZ, the New Zealand Law Society (“the NZLS”) and several of the major accounting and law firms.  

The NZLS questioned why the bright-line test was needed at all given that the burden of proof falls on the taxpayer. CAANZ suggested there was a “high risk that the overall package of reforms will lack the coherence that it requires and will not provide taxpayers with an appropriate degree of certainty”. 

Critics questioned whether it would raise any significant revenue (the Regulatory Impact Statement estimated it would raise an additional $5 million per annum).  

A critical part of the proposal is when the two year period starts and finishes. The Bright-line Bill proposes the two year period should start on the date of registration of title rather than the date of entry into a sale and purchase agreement. Submitters were particularly critical of this because it differs from the general definition used for the purposes of the land provisions in the Income Tax Act 2007.

Despite the fierce criticism (one submitter called the Inland Revenue’s arguments supporting this change “fallacious”), the new date of purchase definition was left unchanged. An exception has been made for purchases “off the plan” to allow the period between entering into an agreement to purchase the land and the date of registration to be included for the purposes of the two year period.  An exception to what is already an exception is a tailor-made recipe for confusion.

The NZLS and other submitters noted that speculators targeted by the Bright-line Bill would probably change their behaviour to ensure land is held for the two year period. Consequently, those most likely to be taxed under the Bright-line Bill would not be speculators but selling because of a change in their circumstances such as financial hardship, mortgagee sale or insolvency. Submissions suggesting exceptions for such circumstances were dismissed.

Submitters also raised concerns around the “main home’ exemption, particularly for such properties owned by trust. There was near universal opposition to the “ring-fencing” of losses arising from sales solely due to the bright-line test. Such losses can only be offset against income from sales made under other land provisions.  

The overall conclusion is that the Bright-line Bill is not likely to meet its objectives, especially that of minimising compliance costs. It’s not likely to raise much additional revenue either.

Many of the problems with the Bright-line Bill stem from its sudden introduction outside the usual Generic Tax Policy Process. Normally, proposed changes to tax legislation are signalled well in advance. The proposals are then worked through a consultation process usually lasting between 12 and 18 months before the relevant legislation is introduced.  

By contrast, the haste with which the bright-line test is being implemented is illustrated by the following timeline:

14th May Initial announcement of proposed bright-line test
29th June Issues paper on the bright-line test released
24th July Closing date for submissions on issues paper
24th August Taxation (Bright-line Test for Residential Land) Bill introduced into Parliament
9th September Call for submissions on Bill
17th September Closing date for submissions on Bill
1st October Bright-line test comes into effect
20th October Bill reported back to Parliament
4th November Bill passes its second reading

The last piece of major tax reform crashed through outside the Generic Tax Policy Process was the abolition of loss attributing qualifying companies and introduction of look-through companies. It’s not a happy precedent. The qualifying company changes resulted in considerable and ongoing complexity, which a recent issues paper hopes to resolve. (The NZLS’s view: “The Issues Paper proposes to resolve perceived complexity by creating more rules and exceptions.”)

What is troubling is that major technical issues identified by CAANZ, the NZLS and others during the truncated consultation process have not been properly addressed. In particular the decision to introduce a separate definition of the date of acquisition of land for the bright-line test from that used for other land transactions seems set to cause endless confusion.

Consequently, the concern is that far from creating “an easy to enforce rule”, the bright-line test will further complicate an already incoherent situation and fail in its objective of targeting property speculators.

Good tax policy would take steps to remove inconsistency and improve coherence. The bright-line test does the opposite, all for the sake of maybe $5 million additional tax revenue.  

Ultimately the bright-line test is an example of politics in the form of being seen to do something trumping good tax policy. Whenever this happens it’s invariably only to the benefit of tax advisers earning fees as they pick a path through the resulting morass of poor legislation. 

This was what the Generic Tax Policy Process was designed to avoid and it would be wise if governments kept that in mind when introducing tax legislation. Otherwise we will end up with more legislation “full of sound and fury, signifying nothing.”


*Terry Baucher is an Auckland-based tax specialist and head of Baucher Consulting. You can contact him here »

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Why would you allow an exemption for "off plan" sales??

These are most likely to be flipped and if the day you sign up is day one, you mightn't have even settled by the time two years is up!!

Income is income, so it should all be taxed. Their failure to do so is what creates the doubt, uncertainty and loop-holes. However the so called gains should be after inflation is deducted. Taxing inflation would be totally wrong. The interest paid on a mortgage should only be tax deductible above the level of inflation and interest earned on deposits should only be taxed above the level of inflation.


It sounds like they want to reduce short term speculation rather than generate revenue. By your own claim speculators will change their behavior, it would seem a success. In fact oddly you both manage to state the objectives of the bill clearly - 1. to target short term speculation, 2. minimize sales exposed to the tax where the intention wasn't resale and 3. low compliance costs, but then claim its a failure whilst you actually state that it will, in effect, achieve both point 1 and 2 and frankly your disagreement with point 3 is built on flimsy grounds. First and foremost you agree speculators will likely change behavior. Second, you claim the policy fails because it wont generate revenue, but it never claims to focus on generating revenue, in fact its greatest victory would be finding that there is no one left operating in such a way as to be subject to the tax. You say the policy fails because it wont keep compliance costs low but your examples are weak - you say using the date of registration will create confusion but offer no reason as to why? It seems very straight forward? The bright line test timer will start from the date of registration, there, i seem to have a handle on it, who is having trouble understanding that? How will this cause compliance costs, will they need to hire you to tell them this pearl, is that the cost? Perhaps the issue your having here is because of the short time to implement you and other special interest groups haven't been able to perforate the law with sufficient holes.
Lastly you state that the exception for new builds is confusing. I expect the exception for new builds is because they want to encourage speculators to actually do some good and fund new homes, sounds like they wont be flipping (existing homes) but rather providing funding for construction. If more money flows to new builds because of comparative advantage, then you can expect more new homes, sounds okay in a building starved city yeah? Ouch my head, soooo complex... guess i need to hire a consultant to help me. Yeah right.
Pay your tax sir.


Most investors only buy investment houses because of the tax free capital gain. I have been to property investor seminars and this is always the recurring theme.
No Government should encourage or incentivise people to rely on unproductive tax free investments.
This Government did not want to put any restrictions on rental investments for political reasons.
The majority of investors make up some excuse that they did not buy the property with the intention of flicking it off and making a large profit. The IRD did not enforce the previous tax law regarding capital gains.
To me, it is obscene that someone working in a factory on $40,000 per year has to pay 33% tax while a wealthy person in Remuera owning a dozen houses sells one and makes 3 or 4 hundred thousand dollars and pays no tax. This is completely indefensible

Housing is not unproductive
Housing is what ensures NZ workers are productive and can also sustain a great way of life for self and family. The factory worker that you refer to does not need your help and they will save with their partner some money to buy a house in Otahuhu where they will have doubled their money since a few years back. But of course let's tax those rich rocks in Remmers!

First point is those that dont pay PAYE, either through self employment, investments or other means, have all the scope in the world to pay very little if any tax.
Housing as an investment strategy based on capital gains is not productive. Yes it houses people, but produces nothing. Put that same money in a business - you create jobs, you support other business, you add to the economy.

None so blind as those who do not see.

Some of them commute to Wellington and flit around the world at your expense, in an over paid job you voted them in to power to keep the very same system they sponge off...going.

"Provide an easier rule for Inland Revenue to enforce to target short-term speculation in residential property"

Given the ineptitude of some of the IRD staff I have had to deal with of late, easier rules can only be a good thing.

Now all that remains is to ensure that the easier rules are good rules.

Revenue creation is only a short-sighted view of the real aim which surely is to reduce the overall cost of accommodation to those who need it.
If the legislation takes a speculative group our of the market, the initial result will be a slowing or drop in market values. Secondly getting a continuation of the drop may bring some more owner occupiers in.
Governments of all colours ought to be concerned that home ownership has fallen from 80+% down to 50% (in Auckland anyway). The long term social costs will plague future Finance Ministers both at revenue and spending ends of their budgets.
I have little if any respect for those in the legal and accounting professions(?) who think so short termed and only of their own personal wealth.

Hi Terry, how were the old rules enforced? were they enforced? it seems for the last decade that rental returns haven't been enough to cover the costs, so any investors must have been intending to make a capital gain, which should have made it taxable? Doesn't the bright line just tip the existing law in favour of IRD/government/taxpayer? To my mind it should have been taken a step further, income tax applies unless you can prove it was incidental to providing a rental income.