An impact statement from Treasury and the IRD has revealed compliance with the current 2-year bright-line test is below 50% and this is likely to continue when the test extends to five years

An impact statement from Treasury and the IRD has revealed compliance with the current 2-year bright-line test is below 50% and this is likely to continue when the test extends to five years

Officials are warning the Government that the high level of non-compliance so far seen with the bright-line test will continue if it is extended by another three years.

An impact statement by the Treasury and Inland Revenue says “high-level analysis” of taxpayer compliance with the existing bright-line rules suggests voluntary compliance is less than 50%.

The Government is in the process of extending the bright-line test, which requires tax to be paid on any gains made from a residential property sale, from two years to five.

The impact statement says non-compliance will still be an issue if the bright-line test is extended over a longer period.

This is drawing criticism, with ACT leader David Seymour saying the impact statement shows property investors have been managing their affairs to avoid the bright-line test.

“This is a wrongheaded tax – introduced by National and extended by Labour – that has, and will do, nothing to help with housing affordability in Auckland. Nobody ever built more houses in order to pay more tax.”

The impact statement says to manage the risk of non-compliance, IRD has “visibility of property sales and is following up on cases of apparent non-compliance.

“Inland Revenue is also considering changes to existing processes that could drive up voluntary compliance.”

It is not clear what these changes will be.

Revenue Minister Stuart Nash did not respond to questions, instead, a spokeswoman for the Minister referred Interest.co.nz to IRD for “more detailed information.”

Meanwhile, officials also cite concerns that the extra three years will lead to over-reaching.

The two-year test was a very short window of time and, according to the impact statement, is likely to be indicative that the property was bought with the intent to make a profit on resale.

At five years, however, there is a risk that this association will become less clear. Adding more exemptions, such as for illness or restructuring, has been mooted.

The statement also reveals there has been no opportunity for formal consultation on extending the bright-line test due to “time constraints.”

The Government has already publicly indicated that it wishes to “quickly move” to legislate for an extended bright-line test and officials have provided advice on the implementation of this policy in fulfilment of Ministerial direction.

“Thus, this analysis has been prepared on the basis that the decision to proceed on the extension of the bright-line test has already been made.”

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Its a flipper tax plain and simple. You flip, you pay tax. Many professional housing do up people who flip for a living are paying income tax on their profit. Why shouldn't speculators investors not be classified as the same?

I'm forecasting compliance to slide further now that people realise they're in the minority when coughing up.

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so they dont want it because of high levels of non-compliance,
gee who would have thought people would buy and sell houses with the intention of making profit and not paying tax,
im shocked not
and not surprised those lazy public servants have not being doing a good job to collect the revenue owed

They don't like voluntary - so make it mandatory - no exemptions

See - fixed

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Since when has tax been a voluntary donation - get stuck in

Well , I guess what IRD and others are saying is that this extension does not serve the purpose it is being legislated for .. which is reducing ( disincentivize ) property traders to, presumably, make houses more affordable ( keeping prices down ) ....
Again, this bill would have so little to do with that purpose as it will reduce the number of properties available for sale going forward ( supply side) as well as reducing demand on properties which are completely out of the reach of FHB and outside the lower decile sales brackets ....

At the end of the day, people who do this sort of thing for living will continue doing that if they see a profit in turning over a house or a project - taxing them will not really stop the pros of this kind of business ( lack of capital gain will, as it is happening now) .. so there is nothing to this other than Mostly tax grab and feel good for the type of people who have limited business horizon and some envy.

Not sure why they are stubbornly rushing things through ! .. this and the foreign buying bill which is getting more bad press and resistance .... Why is the Urgency ? ... markets have calmed down and new RVs are in place and they are there to stay for a while ( i have never seen RVs go down at all) ...

Not all things and opinions in life is conspiracy theory ... but as Hosking put it today in this video, " Ideology is not a blueprint for sensible policy " ....
http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=1200...

Sub-head: Reality bites Good Intentions Paving Co (2017) Inc.

If anyone is stupid enough not to comply with Brightline then they are comfortable with having to live life looking over their shoulders. The investigation unit must be flat out.

On top of the principal sum owed, IRD charge a raft of penalties. Before long the amount owed has doubled.......

It's just not worth it.

The non-compliance rate is astonishing and it bodes poorly for the introduction of a CGT.

I can't help thinking that the main effect of the TWG will be to spawn a huge tax avoidance and evasion industry.

All the tax lawyers and accountants out there will be rubbing their hands with glee.

I'm confused. If compliance to a tax rule is not occurring, that is an avoidance of tax, subject to the harsh penalties that go with it. Seems that the IRD need to get off their butt and have a crack at a few, impose the penalties and then see what happends. A drag throught land titles will sort that.

As for little boy Seymour, structuring affairs so as not to be caught in the net is a different matter all together. Structured correctly, then non compliance is not an issue - as with the correct structure there is no compliance required.

Seems a beat up to me from those who don't want this tax.

I agree. It’s a tax, if people aren’t complying they need to be investigated, fined and if necessary prosecuted. I have no problem with this tax impacting every property investor regardless of why they buy or why they sell. If you don’t like sharing your capital gains with the government don’t buy. Call it a back door capital gains tax, call it whatever you want, but it achieves my policy objectives so I support it.

As a property investor (not a flipper) I support the concept of the bright-line test as being fair and reasonable.
However, there is an elephant in the room.
A tax on property transactions is fine when the property market has been increasing as over the past six years; but there is now increased risk of losses on the sale of the properties with the increasing likelihood of at least some cooling in the property market.
The reality is that the 50% cohort who fail to declared profits within the two year test, will have no hesitation in declaring a loss - and tax rebate - if they face a loss on sale price vs purchase price.
This is a fundamental flaw with any capital gains tax; declare if you lose, try to keep mum if you gain.

And it could be that some, or most, of these undeclared 50% did not make a profit to declare, or actually made a loss !

Otherwise the IRD will look a bit like this lot:
http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=12005774

Ring fence losses. Simple.

Personally I think a comprehensive land value tax is a far better option.

Surely buying a property is a risk to whoever buys whether investor, homeowner etc. Easy - no tax rebate if a loss. I would go as far as to stop tax write offs on residential investment properties. If a homeowner can't do it, why should an investor? Happy to have that explained.

Even in a falling market there will be evil predators who target old ladies and buy well below the market value.
Also, if they allow exemptions for health reasons, I think the old nebulous sore back trick will do the trick nicely!!

Does data sharing in NZ allow IRD access to local government rating databases?
If so, then surely near 100% compliance is possible.

They could just look at publicly available sale information like the rest of us! It's pretty easy to see the profit or loss made on any real estate sale. Proving it's not the owner's 'main home' is more difficult.

The two year bright line only started from October 2015 so would not capture many people YET! If someone has sold a property after October 2017 the lawyer has to obtain a statement from you at time of settlement which is sent off to IRD and if you bought and sold and it was not a family home then you will pay tax - no way to avoid it - however would not have picked up that many people as most would wait the full two years before selling - so if you purchased say April 2016 and sold May 2017 you would not even have to account for it until the end of the F2018 tax year i.e. pay your tax some time after 31 March 2018. Surprise, surprise if not much tax revenue is being gained from this yet. I personally know of people who are waiting until the two years is up before they sell. Of course many of these foreign off shore sellers will never pay their tax - hard to pin them down in some of the countries they come from. What should actually happen is that the lawyer should be required to deduct the tax from the settlement and pay it direct to the IRD. How can 50% not be paying the tax when the IRD are sent the information directly from the lawyers. Most property flippers are GST registered taxable entities or sole traders so the bright line makes no difference to them. Extending to 5 years and enforcing it and deducting the tax from the settlement proceeds is the only way to go otherwise the funds will head offshore to China or wherever and IRD will not see a cent. Labour need to beef up the system and collect the tax as was always intended by National when the Nats introduced the bright line CGT.

So very right - excellent understanding of how it should in fact work - thank you.

Does anyone know how the Brightline Test works fully?
Are the costs of owning the rental property taken into account when the so called capital gain is decided???
If not then that is unfair and landlords won’t be bothered spending money on improvements as much!

You would think we’re trying to do the impossible here.
In my experience Australia and the US have capital gains tax and it works – not necessarily to stop speculation etc – but to increase the tax base and create “fairness”.
Obviously what’s fair to one may be considered grossly unfair and inequitable to another.
In the above you’re talking 20% to perhaps 35% (thereabouts) tax – you’ve potentially still made a decent buck.

Would be interesting to know what percentage of those not paying are foreign investors vs domestic investors.