Existing property tax rules to be bolstered

Tax Alert - June 2015

On 17 May 2015 the Government announced as part of the budget 2015, proposals to bolster the existing tax rules and improve compliance in respect of property transactions.

Amongst the compliance measures announced is a “bright-line” test which will tax residential property sold within two years of purchase.  This bright-line test will not apply to a seller’s main home, inherited property from a deceased estate or that which is transferred as part of a relationship property settlement.

Despite some media reports, this is not a capital gains tax as such.    Essentially it strengthens a long-standing rule which already taxes gains made where land is acquired for the purpose of, or with the intention of selling it.  The problem with the existing rule is that savvy taxpayers can work around it to a degree and it can be difficult for Inland Revenue to set about proving that an intention to sell existed at the outset.   A bright-line test takes away any argument over having to prove or disprove this intention.   Inland Revenue is clearly aware of the so-called “investors” who turn over rental properties in short succession and this rule will impact this group.

Whether two years is the right length of time for a bright-line test remains to be seen.  It would appear to be a somewhat arbitrary line in the sand.  On the one hand, it may create just enough doubt in a speculator’s mind at the time of purchase about what the state of the market will be in two years’ time – albeit that a taxed profit is better than no profit at all.  For those that argue it is not long enough, there is always the existing rule for Inland Revenue to fall back on in any event.  If a pattern of buying and selling properties “around the two year mark” emerges, Inland Revenue may view this as supporting an argument that there was always an intention to sell at the outset.   On the other hand, any bright-line test at all could have a detrimental effect for those seeking to purchase homes and result in housing stock being tied up longer as investors hold onto residential property for at least two years.

We still need the finer details of these measures.  An issues paper will be released in July 2015 for consultation with the final measures being introduced in a tax bill scheduled for late August 2015.   The bright-line test will apply to properties bought on or after 1 October 2015 with any profits being taxed at the marginal income tax rate of the seller.

A number of other property compliance measures were also announced at the same time which target non-resident buyers and sellers of property.

  • All non-residents and New Zealanders buying and selling any property other than their main home, will need to provide a New Zealand IRD number as part of the usual land transfer process with Land Information New Zealand.
  • All non-resident buyers and sellers must provide their tax identification number from their home country, along with current identification, such as a passport.
  • To ensure that there is compliance with anti-money laundering rules, all non-residents purchasing New Zealand property must have a New Zealand bank account before they can get a New Zealand IRD number.
  • The Government will also investigate a withholding tax for non-residents selling residential property.  Indications are that such a withholding tax will be automatically withheld on such transactions which will then require the non-resident to apply for a refund from Inland Revenue to the extent applicable.  This in turn raises interesting issues about which intermediary will be required to withhold such a tax from the sales proceeds and the compliance costs of doing so (i.e. would this be the bank or lawyer responsible for withholding the tax and passing it to Inland Revenue?)  Officials will consult further about this with the withholding tax to be introduced mid 2016.

These compliance measures look like a sensible step in seeking to ensure property investors, whether they are non-residents or New Zealand residents, pay their fair share of tax in relation to property sales.  It will also help to identify the true overseas buyers and sellers of property and ensure tax can be collected at source more easily from those non-residents, particularly those subject to the two year bright-line test that might otherwise escape the New Zealand tax net.

The measures may also act as a deterrent for some property investors speculating in the New Zealand property market.  Those that buy and sell quickly in the hopes of making a tax free gain may now be more cautious about doing this or at least how much they are prepared to pay for a property, which in turn may just free up some housing stock for other buyers looking for a place to set down roots and call home.  

For more information, please contact your usual Deloitte advisor.

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