The measures proposed in the well-heralded bill aim to ensure that people pay tax on gains from property sales.

They are also intended to improve compliance with existing residential land sale rules.

The main feature of the bill is the bright line test which requires income tax to be paid on any gains from residential property purchased and sold within two years.

Exceptions to the test include the sale of an owner’s main home, inherited property, or the transfer of property in a relationship settlement.

Revenue Minister Todd McClay said the proposed new test does not apply to the sale of land predominantly used as business premises or farmland.

“But the bright-line test makes it clear that all property buyers, including overseas buyers, who buy and sell a residential property within two years, will be taxed on their gains.”

In order for property buyers to better understand their income tax responsibilities, the bill establishes a range of relevant definitions, terms and rules.

For example, it defines the start and end of the two-year bright-line period.

Generally, the period will start with the purchase of the registered title for a property, and end when the same buyer officially agrees to sell the property – although an additional rule will apply for “off the plan” sales.

The bill also limits the use of losses arising under the bright-line test and includes an anti-avoidance rule to prevent companies or trusts being used to circumvent the test.

McClay said the proposed bright-line test is the result of the Government’s consideration of feedback received during public consultation earlier this year.

It will supplement the current “intention” test in the Income Tax Act 2007, which can be difficult to enforce, he added.

“The changes proposed in this bill, and other recent legislation, will help IRD to more accurately identify investors in residential property – here and overseas – and ensure they pay their fair share of tax.”

More information about the bright line test is available here and here.