The bright-line test states that a profit on the disposal of residential property is taxable when the residential property is disposed of within five years of acquiring it. For these purposes residential property does not include farmland and excludes a person’s “main home”.
A question which has been raised numerous times is – is a sale of a lifestyle block subject to the bright-line test? Inland Revenue has kindly provided guidance to this question in the form of QB 18/17 – Income tax – bright-line test – farmland and main home exclusions – sale of lifestyle blocks.
The sale of a lifestyle block will be excluded from the bright-line rules if the lifestyle block is either:
Farmland is defined in the Income Tax Act 2007 to be land that:
Therefore, to qualify under the farmland exclusion the farmland has to be currently used in a farming or agricultural business or because of its area and nature the land could be used in a farming or agricultural business in its current form. The leasing of a farm or land is not an agricultural business.
A business is not a defined term and can be a grey area. There have been numerous court cases discussing when a business exists. The leading case on the meaning of business is Grieve v CIR. This case interpreted “business” as meaning an activity carried on in an organised and coherent way with an intention to make a profit. A person’s intention to make a profit will be evidenced by their conduct. Factors that are relevant for determining if a person is carrying on a business include:
Lifestyle blocks, typically, are not businesses and are more of a hobby due to the size and scale of the operations. This means in most circumstances a person will need to rely on the main home exclusion to exclude the sale of the lifestyle block from the bright-line test.
QB 18/17 states that the main home exclusion will apply where:
If either exclusion does not apply the bright-line rules will apply on the disposal of the lifestyle block. Please give us a call if you think your lifestyle block is subject to these rules or if you have any questions.