Explanation to Bright - Line Test:

Let’s Understand whether the bright-line test and main home exclusion apply to a sale of a lifestyle block within the bright-line period with the help of following scenarios:

Scenario 1:

Is the selIer carrying on farming or agricultural business?

Is the lifestyle block being worked in the seller’s farming or agricultural business?

If answer to both the questions is YES, then the lifestyle block is farmland. The disposal is not subject to the bright-line test.

Scenario 2:

Is the selIer carrying on farming or agricultural business?

If answer to this question is NO, then we investigate the possibility factor and that is:

Does the lifestyle block include an area of land that is presently suitable to be worked as a farming or agricultural business, without significant investment or modification?

If its YES, then the lifestyle block is farmland. The disposal is not subject to the bright-line test.

Scenario 3:

Following Scenario 2, if the possibility factor is also NO, then we investigate the main home exclusion factor which we already discussed in our previous article and as per this factor we check:

Has more than 50% of the area of the lifestyle block been used for, in connection with, or for the benefit of a dwelling that was the seller’s main home and its been owned for more than 50% of the time seller has owned the lifestyle block?

If YES, then Main home exclusion applies. The disposal is not subject to the bright-line test.

If NO, Main home exclusion does not apply. Bright-line test applies to disposal.

NOTE: Lifestyle blocks are generally not farmland.

Application:

For E.g., Alvin and Daeniel had a 3-hectare property that they sold within the Brightline period. The land included 2.5 hectare of mango trees. The balance of the land was used for a house that Alvin and Daeniel used as their main home as well as a small garden and an area for grazing Daeniel’s sheep.

The mango trees were leased to a mango-growing company that looked after the trees including spraying the trees, mowing between the rows of trees and picking the fruit. The lease gives exclusive possession to the mango-growing company and Alvin and Daeniel do not go into the mango orchard. The property was not farmland because:

• It was not being worked in an agricultural business carried on by Alvin and Daeniel (rather, it was being worked in the mango-growing company’s agricultural business); and

• In this case, the 2.5 hectares of mango trees was not of enough scale to be capable of being carried on as a mango-growing business given the number of mango trees on the land.

The main home exclusion is not available to Alvin and Daeniel because less than 50% of the area of the property is used for their dwelling. The dwelling, its garden and the land for grazing the sheep are all physically used for purposes in connection with the enjoyment of the dwelling, rather than for any other purposes. However, most of the land (83%) was leased to the mango-growing company and was not used for Alvin and Daeniel’s dwelling.

Therefore, the sale by Alvin and Daeniel of the property within the bright-line period will be taxed under the bright-line test.

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