An interpretation of the bright-line test could result in a new tax on the sale value of your family home. What’s going on?

Inland Revenue’s new interpretation of the bright-line test could see thousands of Kiwi homeowners slapped with a 39% capital gains tax on the sale of their family home.

The bright-line test means people who sell properties within 10 years must pay tax on capital gains, though family homes and investment new builds are explicitly exempt from the tax.

However, IRD is proposing that the exclusion no longer applies if the owner is away from the property for more than 12 months. In such a case, the tax would be applied according to how much the property had been used by the owner.

The government backpedals

The Labour government says the interpretation wasn’t in its plans and would change the law if needed.

Tax experts are similarly squeamish, with Dentons Kensington Swan partner and tax expert Bruce Bernacchi calling the new interpretation “outrageous”.

One scenario offered by IRD really stuck in his craw.

“Rebecca and Luke” co-owned a three-bedroom apartment in Auckland. Rebecca was seconded to the Middle East for two years, and Luke stayed behind to look after the kids.

She comes back, they sell the house, and Rebecca is taxed on her share of the gain for the period that she was away – even though the property remained the family home.

According to Bernacchi, the interpretation is shocking and could mean owners being taxed on homes they were forced to leave following Cyclone Gabrielle.

Taxpayers Union campaigns manager Callum Purves was similarly damning in his assessment.

“Even if you only own one house, and even if your partner or kids are still living at home, if you spend a few months away the IRD is now bending logic to call you a property speculator to wring as much tax out of you as possible,” he said.

The IRD is expected to publish its interpretation within weeks.

PM provides assurance

A spokesperson for Prime Minister Chris Hipkins’ office said it was never the government’s intention to tax the family home and “if needed we will change the law to make that clear”.

“We are seeking clarification on the issue and if there is a loophole the rules will be changed.”

Cyclone victims can be “assured that they will not be affected by the bright-line tax”, the spokesperson added.

Watch this space and hope sense prevails.