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Bright Line Test – What do you need to know?

The bright-line test results in residential property acquired and disposed within two years to be subject to income tax unless an exemption applies. It is additional to the intention test, (if you buy a property with the intention to sell it for a profit, the gain/loss is subject to income tax, regardless of the time frame).

 Exemptions that may apply to the bright line test are:

  • The main home exclusion test. This exemption is specific; for example, you can only have one main home (a beach property may not count, nor would two main homes even if your time was split between them). You can only use this exemption twice within two years; for example, a person regularly buys property to renovate and sell, and lives in the property while they undertake the renovations
  • If inherited property is sold the bright line test does not apply.
  • If relationship property is transferred between spouse and partners (where a relationship breaks down) the bright line test does not apply (subsequent sale of the transferred property will be subject to the bright-line test).
  • If the property is held in a Trust, the main home exception can still apply, only if,
    • The trust-owned property is the main home for a beneficiary of the trust; and
    • The principal settlor of the trust does not personally own a main home (the principal settlor being the person who has settled the most property, by value, on the trust).

Other Practical Implications 

  •  Losses can only be used to offset against income from the gain on sale of property (not on wages and salaries income). They are ring fenced and may be carried forward.
  •  Depending on the type of acquisition of the property will result in a different start date of the two-year test. For a standard sale and purchase agreement, the start-date will be the date of title registration (generally settlement date). For ‘off the plans’ sale, the date is the date of entry into the contract to purchase.
  •  The bright line test does not consider changes in personal or financial circumstances as a reason for selling property within two years. This is not an allowance exemption.

Example

  •  David and Linda purchase a residential rental property in January 2016 with the intention of a long-term investment for $400k. In August 2017 both their son and daughter return home from living overseas. David and Linda want to sell their rental property and gift their children the sales proceeds to help each of them into their first homes. They approach a real estate agent who advise the market value is now $540k.
  •  If this property was sold prior to January 2018, the difference between the purchase price ($400k) and sale price ($540k) would be subject to income tax due to the bright line test.

For more information, or any questions feel free to give Tim a call on 07 8234390

This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.



 

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