Inland Revenue steps up activity on taxing house sales
Tax Alert - December 2020
By Susan Wynne
With climbing average residential property prices and debate on which buyers are driving the increase in demand and prices, it should come as no surprise that Inland Revenue is also actively looking at residential property transactions. Recently various commentators and politicians have raised the prospect of extending the bright-line test period. The Minister of Finance has not ruled this out, noting that he has asked Treasury to advise on whether the bright-line test is achieving its goals.
Inland Revenue first established a Property Compliance Programme back in 2008. Successive Government budget allocations in 2010, 2013 and 2015 have provided resourcing for this programme to target property transactions, including for the development of data analytics capability. Combined with the introduction in 2015 of the bright-line test specifically for residential property, it is becoming easier for Inland Revenue to identify residential property sales that may be taxable.
We are aware that Inland Revenue has been contacting taxpayers to question if recent residential property transactions have been treated correctly for tax purposes, where it believes the bright-line test may have been triggered.
While there is complexity in the details, broadly the bright-line test operates as follows:
- Profits made on residential land acquired and disposed of within two years (if bought between 1 October 2015 and 28 March 2018 inclusive) or five years (if bought on or after 29 March 2018) is taxable, subject to some exceptions. These timeframes are relatively easy to monitor and enforce. Combined with data analytics, Inland Revenue has more ability than ever to assess if a residential property sale may be taxable.
- The bright-line test applies to residential land, including land with a dwelling on it or bare land. It does not apply to business premises or farmland.
- The bright-line period generally starts when title to the property is transferred and ends when a contract to sell the property is entered.
- For sales off the plans, where no title is available, the start date is when a person enters into a contract to buy the property.
- Where a property purchaser uses a nominee this can further complicate the start date for the bright-line test depending on the nomination arrangements.
- The bright-line test does not apply to a person’s main home and a person can only have one main home. This exception is available where residential property is held in trust but there are additional requirements. There is no main home exception for residential property held by a company. There are also limitations to how many times a taxpayer may use the main home exception.
- If subject to the bright-line test, taxpayers will be taxable on the proceeds from the sale of a residential property and allowed deductions for costs related to that property sale according to ordinary tax rules.
Also introduced in 2015 was the requirement for buyers and sellers of land, unless exempt, to provide tax information on every property sale by completing a land transfer tax statement, and this is provided to Land Information New Zealand (LINZ). Both the buyer and seller are required to provide separate statements and include their IRD numbers. Consequently, Inland Revenue receives near real time information on land sales from LINZ, including the tax information collected, and uses this information to monitor land transactions and check that any tax obligations arising from a property transaction are met. This information combined with the capability from the Business Transformation programme and Inland Revenue’s new START software is allowing Inland Revenue to collect and use data to see if taxpayers are filing as they should be.
We anticipate that Inland Revenue’s focus on residential property transactions and use of data collection will only continue. Inland Revenue has indicated that from early 2021 they plan to contact taxpayers within a few weeks of a potential bright-line property sale to alert taxpayers and their tax agents that the bright-line rules need to be considered.
The Inland Revenue approach of identifying taxpayers who may not be filing as they should and providing an opportunity for those taxpayers to file correctly is positive in helping to educate taxpayers and encourage compliance. However, we believe there is still a general lack of understanding of when and how the bright-line rules may apply and the importance of providing correct information to LINZ via the land transfer tax statement. If you would like more information about the bright-line test and its application, please contact your usual Deloitte advisor.
December 2020 Tax Alert contents
- Tax rate change enacted along with big-brother information gathering powers
- Inland Revenue steps up activity on taxing house sales