On 31 August 2018, Inland Revenue released draft Question We’ve Been Asked (QWBA): “ income tax — bright-line test — farmland and main home exclusions — sale of lifestyle blocks”. The draft QWBA explains when lifestyle blocks sold within the bright-line period will be excluded from the bright-line test. It will be of interest to sellers seeking to rely on the farmland or main home exclusions.

The deadline for comment is 12 October 2018.

The bright-line test

The bright-line test taxes residential land sold within the bright-line period. The bright-line test applies to residential land that a person first acquired an interest in, on or after 1 October 2015. The period of the bright-line test increased from 2 years to 5 years for residential land that a person first acquired an interest in, on or after 29 March 2018. The draft QWBA refers to the “bright-line period” which will be 2 years or 5 years, depending on when the seller first acquired an interest in the land.

In the draft QWBA, it is assumed that:

  • there was a dwelling on the land that was the seller’s main home
  • the property was not held in trust
  • none of the other land rules in ss CB 6 to CB 12 of the Income Tax Act 2007 apply to the sale of the land (eg s CB 6, which applies to the sale of land acquired for the purpose of resale). The bright-line test potentially applies only where the sale is not taxed under any of the other land rules, and
  • none of the exceptions to the main home exclusion apply.

Question

When is the sale of a lifestyle block sold within the bright-line period excluded from the bright-line test?

Answer

The sale is excluded when the farmland or main home exclusions apply.

  • The farmland exclusion will apply where the land is, or could in its current state, be used for a farming or agricultural business carried on by the owner. Lifestyle blocks are generally not farmland.
  • The main home exclusion will apply where:
  • more than 50% of the area of the land has been used for the seller’s main home. This includes curtilage and other land used for residential purposes, and
  • the land has been used in that manner for more than 50% of the time the seller owned it.