Parliament’s Finance and Expenditure Committee has largely declined National’s suggestion to make the bright-line test more user-friendly for parents who help their kids buy houses.
However, it’s agreed to a minor change to the draft legislation for the quasi-capital gains tax, which will offer some relief to the 'Bank of Mum and Dad'.
The Government a year ago decided to extend the bright-line test from five to 10 years, meaning anyone who buys and sells investment residential property within 10 years has to pay income tax on any gains made. It kept the bright-line period at five years for new builds.
While the change became operative in March 2021, the rule's finer details are still being worked through. The bill enacting the change is expected to be passed soon.
Concessions won't be made for parents helping kids
National’s Commerce and Consumer Affairs spokesperson Andrew Bayly was concerned that under the first iteration of the bill, a parent, who co-bought a property (which they didn’t live in) with their adult child, would have to pay tax on gains if they sold their share back to their child within 10 years.
Bayly worried the rule, aimed at preventing property speculation, would harm parents simply trying to help their kids.
Chartered Accountants Australia and New Zealand (CA ANZ) advised there should be a carveout in the bright-line rules for family-related transactions.
However, the Committee said 'no' on the back of advice from Inland Revenue.
Inland Revenue said creating such a carveout would be a “substantial shift in policy”.
It also worried the exemption could enable investors to try to minimise their tax bills by transferring ownership of their properties to family members on lower personal tax rates.
Inland Revenue said people could help family members without becoming legal owners of properties. They could, for example, gift them money to help with a deposit or act as a guarantor for a loan.
Re-setting the bright-line clock
The Finance and Expenditure Committee did however make a change to the bill, which both Bayly and CA ANZ advocated for.
Under the updated bill, the bright-line clock won’t be reset if someone sells down their stake in an investment property.
Let’s say a parent and adult child buy a house 50-50 in 2022. In 2025, once the child has had time to save a bit more, the parent sells half their share to the child.
Under the initial bill, the bright-line period connected to the remainder 25% owned by the parent would reset, meaning gains from a sale made within 10 years from 2025 would be taxable.
But under the updated bill, this reset wouldn’t happen. So, gains from a sale by the parent would only be taxable if they sold within 10 years from when they first bought into the house in 2022.
The change to the bill removes an obstacle the parent would otherwise have faced if they progressively sold down their share in the property.
The situation would be different for the child, however. The bright-line clock would be reset on the 25% share they bought from their parent.
Let’s say the child moved out of the house in 2030 (technically turning it into an investment property), before selling it in 2033.
They wouldn’t be taxed on gains related to the 50% share they’d owned since 2022, because they’d owned this stake for more than 10 years. But they would be taxed on gains related to the 25% stake they’d owned for only eight years, since 2025.
The same rules would apply if two friends, rather than family members, bought a house together, and one bought out the other over time.
CA ANZ tax lead John Cuthbertson worried about the complexity of the rules.
An added complication
An added complication under the extended bright-line test is that a property is considered an “investment” if it isn’t someone’s main home for a continuous period of at least 12 months.
Looking at the example above again, the child would need to pay tax on gains related to the 25% share they bought in 2025 and sold eight years later in 2033.
But because they lived in the house until 2030, it was only an investment property for three years. Hence only three eighths of the gain on this stake of the house would be taxed.