The bright-line test has triggered potential tax liabilities when a residential property is sold within 2 years of purchase. This raises questions of how it would apply in the context of relationship property settlements. Although tax issues are often not at the forefront of couples’ mind when a relationship breaks down, it should be carefully considered as part of any settlement discussions.
The “bright-line” test
This tax rule applies to residential property acquired from 1 October 2015 that is sold (or otherwise transferred) within two years of acquisition unless an exception applies. Residential property does not include dwelling that is the person’s primary residence.
If a residential property transaction falls into category, the property sale is taxable at the marginal tax rate even if the seller did not acquire the property with an intention to resell.
Application to relationship property settlements
When a relationship ends, property may be transferred between the spouses or partners.
The general rule is that the transfer of property under a relationship property agreement will not be subject to a tax liability under the bright-line test. The transfer is deemed to be treated as to have been sold at cost and the original date of transfer still applies.
However, any subsequent sale of property transferred under a relationship property agreement could still be subject to the bright-line test if it occurs within two years of the original acquisition.
Therefore, there is a need to identify residential properties other than the family home that are acquired after 1 October 2015, as tax obligations could arise following separation if it is held for less than two years.
John acquires an investment property for $600k on 1 March 2016. On 1 January 2017, the investment property is transferred to Jane under a relationship property agreement. The bright-line test does not apply here. However, on 1 June 2017, Jane is forced to sell the property due to her changed personal circumstances. In this case, the sale is taxable under the bright-line as acquisition and disposal occurred within two years.
Although a primary residence (i.e. family home) would be excluded as noted above, the bright-line test could still apply to any investment properties, holiday homes, or other rental properties.
Therefore, if you are selling the property that is not a family home within a short period of time, there could be tax implications.
If you are unsure about the current and future implications of the bright-line test in a relationship property settlement, please seek legal advice from your lawyer.