Family dealing with health crisis falls victim to bright-line test

Source: Stuff.co.nz - 17 March 2022

Charlotte and Andrew Spenceley do not want to sell the land they bought for a new family home, but a health crisis means they have to, and they will have to pay tax on the capital gains they make because of it.

The family used to own their dream home, but when Andrew was made redundant in late 2020 the couple had to sell it as they could no longer afford to service the large mortgage.

In February last year they moved into a rental property, and then bought a section of bare land to build a house on in early March. The plan was to move into their new home in 2023.

While Andrew Spenceley found a new job, he began to suffer heart problems and tests revealed he had a hole in his heart and required at least two expensive operations.

Charlotte Spenceley said the situation had put the family under huge financial pressure, and left them uncertain about the future.
“We decided that to reduce the stress as much as possible, so we can focus on Andrew’s health and prepare for any further changes to our circumstances, it was best for us to sell our land.”

Since they bought their land its value had increased. They paid $320,000, and they were recently offered $557,000 for it.

But there would be bright-line taxes to pay on any gain from the sale. Additionally, the significant rental costs they had incurred could not be offset against the property’s gain.

They had talked to Inland Revenue, and were told there were no exemptions when it came to the bright-line test.

“We feel this is unfair, as it is not an investment property,” Charlotte Spenceley said. “The land was meant for our family home. It was never our intention to sell, but we feel selling is best for us given our circumstances. We feel the bright-line rules were not set up to penalise people in our situation, but they are.”

The bright-line test, which was introduced by the National Government in 2015 but extended by the Labour Government to require properties to be held first for five years and then 10 years, was intended to tax capital gains on investment properties.

But its broad-based approach meant people like the Spenceleys, who were not investors, could be hit by it too.

While “main homes” were exempt from the test, several factors could prevent a property from qualifying as a main home.

Deloitte tax partner Robyn Walker said the Spenceleys were subject to the bright-line because the “main home” exemption would only apply if a dwelling had been built on the land, and lived in for a certain amount of time.

The bright-line period started from the date the interest in land was acquired, she said. In the Spenceleys’ case that was March 1, 2021, which made them subject to the test if they sold within five years.

They would need to have lived in a dwelling on the property for over half the time the property was owned to avoid it.

Walker said it was a sad situation the family found themselves in, but she could not see any way around the rules unless they held onto the property for longer and built something on it.

“The bright-line test is a blunt tool, and this case raises a point about the unfairness of how a capital gains tax has essentially been imposed without any thought about concessions you might get with a properly designed CGT.”

Potential concessions could include rollover relief, discounted tax rates, or concessions for distress sales like the Spenceleys, she said.

A spokesman for Revenue Minister David Parker said the Government was not looking to make any changes to how the main home exclusion worked at this stage, beyond what was already in the current tax bill.

But National Party revenue spokesman Andrew Bayly said the rules were unfair, and thought should be given to concessions for certain situations.

These included people with health concerns, older people moving into retirement villages, police members who were transferred regularly to new areas, military personnel posted overseas or distress sales like the Spenceleys’, he said.

“These are real life events that people can’t control, and the approach of the bright-line rules is harsh and uncaring.”

While the extension of the bright-line test to capture properties sold within 10 years came into force on March 21 last year, the rules were still being finalised with the bill containing them expected to be passed soon.

Parliament’s Finance and Expenditure Committee reported back on the bill last week, but it only recommended minor changes to the rules, according to the Chartered Accountants Australia and New Zealand.

The association’s New Zealand tax leader, John Cuthbertson said the legislation was still complex, and people selling their homes needed to be aware that traps remained.

If a homeowner lived away from their main home for more than 12 months, because they were away on secondment, or undertaking extensive renovations, for example, the bright-line test would apply, he said.

“In these situations, the homeowner isn’t looking to profit, so the outcome could be quite harsh.”

The association’s recommendation that the main home simply be excluded, and that homeowners be able to elect their main home, had been rejected, he said.

“There are no concessions to this, and that means in situations like the Spenceleys’, where their circumstances have changed, people can get caught out.”