Capital gains tax U-turn: Government will exempt cyclone-affected properties from bright-line rule

Revenue Minister Barbara Edmonds said she will change the rules. Photo / Mark Mitchell

The Government will exempt some cyclone-hit properties from being hit with a capital gains tax, under the government’s bright-line test rules and Revenue Minister Barbara Edmonds said she had asked officials for advice to make sure that the application of the bright-line test was in keeping with the “spirit” of the rules, which was not to tax the family home.

The surprise announcement comes after the Herald reported that some cyclone-affected homes would be caught up by the bright-line test, which charges a capital gains tax on properties sold within 10 years of being purchased.

The test was brought in by the Key Government in 2015, but significantly expanded by this Government, which eventually extended the term from two to 10 years. Family homes are meant to be exempt from the rule, but as the Herald reported, some “family” homes can get caught up in the rules.

The rules trigger if a person has been out of their home for 12 consecutive months, even if they own no other home. At that point, the person starts to be treated as an “investor” for the period in which they were away, including people who are seconded away from their home for work, or need to be out of their home because it has been damaged in a natural disaster.

Edmonds said she would introduce an amendment to tax legislation that is currently before the House.

“The Government is clear that it isn’t appropriate to apply the bright-line test to these property sales because the impact of weather events gave the property owner little option other than to sell to the local authority,” Edmonds said.

“We have a precedent for these changes. Amendments have been largely modelled on homes that were similarly damaged by the Canterbury earthquakes.

“Officials from Inland Revenue and the Cyclone Recovery Unit have been working on a fix since the Government and local authorities announced they would jointly fund the voluntary buyouts,” she said.

The Government said the change will mean owners of “flood and cyclone-damaged properties who take up voluntary buy-out offers are not inadvertently caught by tax rules applying to profits on the sale of their land”.

National’s Nicola Willis said episode was an admission that the Government’s changes to the bright-line test had turned it into a “stealth capital gains tax”.

“The Government has been forced to ram through a change to legislation to ensure that cyclone-affected homeowners aren’t captured by their changes to the bright-line test,” she said.

“While this will be welcome relief for cyclone-affected homeowners, it leaves many other New Zealanders in the lurch as they may still be forced to pay a capital gains tax if they sell their family home,” she said.

Edmonds said the change would ensure that bright-line and other tests did not apply “following a Government or local authority buy-out of a North Island flood or cyclone-affected property. It would be unfair for property owners to be taxed under these tests on compensation payments”.

The fix does not change the rules for people caught up in the “Rebecca” loophole.

“Rebecca” is an example used by IRD to explain that if a person has been away from their home for more than 12 months, even if their spouse and children continue to live there, they will still be charged capital gains tax in proportion to the period in which they were away from their home.

Edmonds said in her statement that the “bright-line test does not apply to sales of the main or family home”, but National argues that main homes are caught in the rules.

Asked whether the officials’ review of the changes would exempt cases like “Rebecca”, Edmonds said she had “asked for advice on it”.

“It’s quite specific situation so I have asked for advice on it,” she said.