Inland Revenue is watching your residential property transactions…
Tax Alert - May 2021
By Susan Wynne
Anyone keeping up with the debate on the housing sector will be aware that the tax system is one of the tools being used to try and slow demand and assist first home buyers over investors. The bright-line test, which taxes profits made on residential land acquired and disposed of within the applicable bright-line period, subject to some exceptions, is one such tool.
The extension of the bright-line test from 5 years to 10 year (see our comments in the April 2021 Tax Alert) has generated interest in the level of compliance with the bright-line rules. As a result, Inland Revenue has recently released information on its compliance activity and compliance rates in this area.
An important takeaway from the information Inland Revenue has provided is that it is actively monitoring when residential properties are brought and sold and how this compares to income tax returns filed. The information collected via the land transfer tax statement completed by both buyers and sellers of land (unless exempt) and provided to Land Information New Zealand (LINZ) includes IRD numbers to identify the parties to a transaction and is being used by Inland Revenue to monitor land transactions.
We have previously discussed increasing Inland Revenue activity in relation to the bright-line test in the December 2020 Tax Alert. The results of that initial activity are now available and make for interesting reading.
To better understand taxpayer compliance with the bright-line rules Inland Revenue has looked at data from the 2019 and earlier tax years where property sales have been completed and the related income tax return has been filed. From this data, Inland Revenue has determined:
- For 2019 of the 28,552 property sales which occurred during the bright-line period, 9,126 transactions were identified as being potentially taxable based on the information Inland Revenue has on when properties are bought and sold.
- While Inland Revenue has noted that investigations into the 2019 property sales are ongoing, 33% correctly included bright-line income in their income tax return filed. Inland Revenue usually has sale price data so can determine what it might expect to be included as taxable income.
- Based on prior year investigations, experience tells Inland Revenue a further 37% are likely not subject to the bright-line rules, usually due to the main home exemption. Taxpayers are simply not completing the land transfer tax statement correctly to indicate this.
- Other taxpayers will have included the bright- line income in their income tax return but not in the right way.
- Where taxpayers were found to have not reported income under the bright-line test, 80% will correct their mistake when Inland Revenue first contacts them.
- A small percentage (estimated at 3%) will not be reporting income required under the bright-line test and will require further enforcement to return bright-line income.
Based on this early data Inland Revenue notes that most of the bright-line property sales reviewed were meeting their bright-line test obligations.
What we can learn from these results:
- If you are selling residential property check if you will be subject to the bright-line rules. Taxpayers may not be familiar with how the rules work and there is some complexity with how the dates apply – especially as these have been changing. Your usual Deloitte advisor can help if you have any queries.
- Compete your land transfer tax statement correctly and in full as part of the sale and purchase documents. A large proportion (37%) of taxpayers identified by Inland Revenue as potentially subject to the rules were actually excluded, usually by the main home exemption. Further investigation by Inland Revenue could have been avoided by completing the paperwork correctly, e.g. ticking the main home box if applicable.
- Correctly input any bright-line income into your income tax return to save getting questions from Inland Revenue later on. Inland Revenue has an optional bright-line property form IR833 that can be completed and submitted with your income tax return either in paper form or in myIR. Any taxable gain on sale calculated should also now be included in the Residential Income box in your income tax return – this is a new box on income tax returns intended to make the process of returning bright-line income easier. Remember that you cannot claim a loss on sale under the bright-line rules in most circumstances.
The bright-line test timeframes make it easy to monitor compliance with these rules through the use of data analytics – and we know that Inland Revenue is watching. It is worth understanding your obligations and requirements in relation to the bright-line rules when selling residential property and when filing your income tax return to save the hassle of dealing with Inland Revenue enquiries at a later date.
As always, contact your usual Deloitte advisor if you have any questions about the tax treatment of selling property.
May 2021 Tax Alert contents
- Inland Revenue is watching your residential property transactions
- Research and development tax incentive – New guidance and deadlines, you might be back in the running for a 15% credit
- Loss carry back rules – is it too late to get the benefit?
- Data analytics - Inland Revenue loves it, how can you make it work for your business?
- Time to review your Employer Superannuation Contribution Tax rates
- Taxing Social Media
- Do you know who can sign your corporate tax return?
- Snapshot of recent developments