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Tax only paid on 3,698 property transactions in 2018/19 due to the bright-line test; No prosecutions made; Question marks remain over whether compliance will improve with an extension to the test

Tax only paid on 3,698 property transactions in 2018/19 due to the bright-line test; No prosecutions made; Question marks remain over whether compliance will improve with an extension to the test

Compliance with the existing bright-line test could be below 50%, raising questions over how effective an extended test will be.

The bright-line test is being extended from five to 10 years, meaning those who buy and sell investment property within 10 years will need to pay income tax on any gains made. The rule will remain at five years for new builds.

Inland Revenue (IR) says tax was correctly paid on 3,070 transactions that fell within the bright-line period, in the tax year to March 31, 2019.

That’s 3,070 of the 9,126 transactions IR believed were “potentially” taxable. 

Altogether, there were 28,552 transactions that fell within the bright-line period in 2018/19.

Tax was paid on a further 628 transactions, after IR chased people up.

But tax remains unpaid on 295 transactions IR identified as taxable.

IR is auditing 351 transactions, and “will be progressively following up” on the thousands of other transactions that possibly should’ve had tax paid on them.

IR didn't prosecute anyone for bright-line test non-compliance in 2018/19.

Interest.co.nz used 2018/19 data in this article because detailed IR data for 2019/20 is unavailable.

IR doesn't know the value of tax paid due to the bright-line test, as these payments are lumped in with other income tax payments. 

The pinch with all of this is, thousands more properties will fall under the bright-line test with it being extended. 

CoreLogic estimated 64% of properties sold in 2017 were sold after being held for less than 10 years. Meanwhile, 42% were sold after being held for less than five years. 

Compliance should improve with beefed up processes

Importantly, IR has upgraded its systems since 2018/19 to improve compliance with the bright-line test.

Treasury said, in its Regulatory Impact Statement for the bright-line test extension, “To assist work on compliance with property transactions, IR now includes property-related information into its Data Intelligence Platform (DIP).

“The DIP brings together data from different sources to provide an end-to-end view of property transactions throughout New Zealand. While still under development, the DIP is being used to identify suspected cases of property non-compliance and is a searchable record of customers’ past property transitions.

“To support an extended bright-line period and exempting new-builds from the new rules, IR would look to enhance information it collects from customers directly and/or via LINZ, however the details of this are still being worked through.”

More broadly, Treasury said: “Compliance levels are constantly changing as annual interventions are carried out including marketing, education, returns policing, direct mail-outs, community compliance visits and audits.

“From March 2021, all customers who have sold a residential property within the bright-line period will receive a letter advising them of their potential obligation and providing resources for them to assess their situation.”

All this said, Treasury recommended extending the bright-line test to 20 years.

Meanwhile IR recommended keeping the bright-line test at five years.

For more on what the changes mean, see this IR document.

Summary table from IR:

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72 Comments

20
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"But tax remains unpaid on 295 transactions IR identified as taxable"

So what's the problem, IRD? Just get on and tax them + assorted penalties, of course.
Oh, and make a big public show of it. Other law-abiding taxpayers like to see that sort of thing.
Maybe that's why they've been waiting? Keep a few easy targets on the radar to shoot out of the property speculation sky as part of an information blitz?

Need to do much better.

Along with much try harder. Sounds like a school report. Sadly, it is a leading Govt Agency, which is failing in its duty.

10
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Why not tax all properties within the bright-line period at the point of sale and get the parties to file returns and exemptions like in the case of several other taxes.

13
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Yes instead of just advising every seller of their obligations and taking years to work it out, simply send them a tax assessment immediately upon sale completion and allow them a short period to pay up or prove it didn't apply in their case. simple really.

edit: and since i saw another comment saying that the seller will have left the country before paying, i suggest the IRD use its draconian powers to compel the lawyers upon settlement of every sale to set aside the funds in Trust until the vendor has proven his case and if time expires then pass the funds to the IRD. Very simple really

That's similar to how it works in Australia.

16
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If these specuvestors do not pay their fair taxes, IRD should immediately take action and, wherever necessary, resort to debt collectors, as they do for all other taxpayers who breach the law. Simple as that.

17
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Shortfall penalties are 150% of the tax evaded. So someone who deliberately hasn't declared and paid the say 100k tax on a 300k capital gain is potentially on the hook for a total of 250k of unpaid tax plus penalties. Add use of money interest at about 8% pa to that for a few years and the IRD will pretty much end up with ALL of your capital gain.
And I say fair enough too if you are dodgy.

Pay your tax people.

They will have left New-Zealand.

Yes some will have left.

Will be interesting to see how many people who end up in negative equity end up going home too.

I can see some very bad scenarios for the banks....people will simply just ghost the bank and leave.

12
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They need to get medieval on their asses.

Yes, Mr Marcellus Wallace, I think we all agree

Yep, but let's look at the self employed, trusts, Air BnB / holiday home rental returns and so forth. Tax evasion is all around and while I agree everyone should pay their share the IRD needs to pursue all groups not go down a rabbit hole that today happens to be property.

I'd say capital gain on a house sale would exceed quite a few Air BnB unpaid taxes and is likely worth the investment of time.

Read the article. They had to make a core technical change to provide them the data required. You think they sit there copy and pasting one roof data into an XL spreadsheet?

You can't just click your fingers and magically integrate 3rd party data sources. Particularly not when the accuracy of said data Intergration needs to very high.

Its not some dinky ecommerce address lookup.

As somebody who does this kind of thing for a living... its not rocket science.

It’s been under development for about 6 years so don’t expect anything radical to come about this any time soon. The old collection mechanism was even more manual.

All of this data is recorded by different agencies so is readily available if someone wants to audit it properly.

Could just do a screen scrape of granny herald I’m sure there has been more than 3000 articles this year about people making a killing selling their houses.

14
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Letters, then public stockades, maybe. I think the French had a nifty way of dealing with the belligerent landed class who were above obligations to the state. It seems excessive but we might get a decent national anthem out of it.

The National Razor. Charles Dickens called it the best cure for a headache!

32
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Australian tax regime

On sale of any residential property, at settlement, the vendors solicitor is required to with-hold 10% of the proceeds until the vendor completes a declaration as to their dealings with the asset. ie that it has been solely used as the vendors principal place of residence, otherwise land tax of 4% of land value applies for each year. Tax Office gets its money up-front. No mucking around

Also
From January 2018, homes left unoccupied for more than six months of the previous calendar year
attract Victorian Government's vacant residential land tax.

Please, don't expect Kiwis to posses similar intelligent on this taxation matter. Greed, is too much embedded on Kiwis bone, blood, flesh.. it's on the DNA.

Yes, and people keep bleating on about the tax changes here. The Brits have abolished tax deductibility, have a 28% CGT on property (20% on anything else that attracts it) AND punitive stamp duty plus very tough tenancy laws. Property investment here has been an absolute rort for the past 30 years, no doubt helped by the fact that so many National politicians, and quite a few Labourites too) have multiple properties. You can easily fact check that, by the way.

Looks like it's costing more than a dollar for every dollar clawed back.

16
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CWBW..worth paying $5 for each dollar clawed back from these parasitic speculators.

Lot of hate there Karl. You may need to get out on the bike and log some sub 24min 16ks. Not everyone is parasitic, pretty broad stroke. I got labelled as a racist for suggesting that long term beneficiaries (with no mention of race, religion or creed) shouldn't have benefits increased whilst having more kids. Imagine if I said Martians are parasitic for being overly represented in negative social stats. Heaven forbid. Best I go for a run :-)

The non parasitic ones pay their tax without the IRD chasing them up, they don’t cost anything

Cheetah..not really any hate. Mainly just posturing and joking, although I do think they should aggressively go after the money including interest. Truth be told, I have made my money in almost the most parasitic ways possible so can't seriously be quick to judge. How did you know I used to be a cyclist? I am guessing you googled me and my ironman results came up. Would have to be a big tailwind and a steep downhill to do 16km in 24mins these days.Need to go out and buy one of those big 4K TVs for this years Giro and Le Tour. Go George Bennett.

Hate to think what I'd be called based on tube tying for any long term beneficiary who has two kids or more. need to define long term of course. 9 months?

Assuming you're right, then that's a candidate for automated data collection. Not that hard.

If they hit them really hard with all the energy and penalties that they can muster (as above 250% of the liable sum) every now and then, then the publicity from the howls of pain should be sufficient to ensure that the rest tow the line. The measure of the dollars recovered for the effort expended does not measure the payments from the rest that are scared into compliance.

The government could also make it part of the sales process couldn’t they. At the very least force estate agents to get a signature from sellers on a letter explaining their tax liability. Remove the “oh I honestly didn’t know” from the equation.

To improve compliance it should be made mandatory for all vendors to fill a declaration if they own any other property individually, jointly as a director in a company or in a trust and if yes, since when and the same to be sent to IRD to decide if vendor not hiding or manipulating to avoid paying tax under family home just like buyers who have to fill an undertaking under money laundering act.

11
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20% compounding penalty interest on all bright line tax evaders, and make the penalties retrospective. These people have broken the law. You end up in jail in the USA for tax evasion and guess what, not many try to evade.

loopiest comment of the day --- EVERYONE who can tries to avoid tax in America -- its a national pastime -- with a massive industry of specialist tax accountants -- hell their recent president spent a lot of time boasting about it with little comeback! Happy to apply penalty interest -- happy for it to compound -- but not many try to evade still LMAO

Karl said evasion of tax results in jail time in the US ... evading tax is illegal ... avoiding it by certified tax consultants is entirely a different matter .... perfectly fine to avoid tax if you do so legally ....

GB..quite right. So you can say that up to 28 March property investors avoided tax by claiming interest payments as deductions. They have been guilty of tax avoidance but not of tax evasion. I also avoided tax by claiming depreciation on my appreciating rentals for many years, something else which should never have been allowed but as with claiming interest on rentals NZ finally wised up to the situation and has now closed two loopholes that should never have been open in the first place. Property investment is a business. Yeah right.

I loved reading Ashley or similar complain how it was not right that landlords can’t claim on their running costs. How is interest a running cost? A property bought with cash costs about 70% less to run than one with debt? The debt was really the cost of buying an existing business, I don’t think that should ever be deductible.

Claiming the financing cost of an asset that is generating income is fine - that's normal. I don't really have a problem with that.

I have a problem when the business has one substantive asset, never operates at a profit and the only time it generates positive cashflow is when the underlying asset is sold. That's not a business, that's a hedge against inflation using future capital gains.

Evade and avoid are different things.

Many will be overseas based sellers, safe in the bosom of their homeland.

Currently assurances regarding anti-money laundering are required by lawyers under a threat of prosecution for failing to act properly .
Surely it would not be difficult for some additional bureaucracy to ensure that on property transactions that Brightline requirements are met on sale of properties.
CoreLogic and LINZ data can readily identify property sales within Brightline period but not if they are main residence or an investment/second property,

How many IRD staff own investment properties?

Great question

Wonder how many the Minister for IRD owns

profile (and others)
Really?
You honestly think that individual IRD staff members and a Minister would act in self-interest.
Get over your conspiracy theories.

My understand that many rental ownes pay no tax at all. The IRD don't even know they exist.

It used to be in our local paper that everyone who was convicted in the local court of drink driving was named as a deterrent (assuming you were ashamed of it).
Now just imagine if a similar list appeared of tax evaders. First of all IRD would be the first to be shamed when people saw how few were prosecuted, then when that was fixed I bet it would be the section of the paper with the "highest ratings". A mugshot of the evader looking suitably sorry for themselves would be great too!

KH
I have heard of two instances where a person operated in a grey area - owning a rental property and letting it to family.
However, any landlord who does not complete bond lodgment form and tax returns is walking a very, very dangerous path. One can think that a tenancy is going to go sweetly but that can change very quickly. There is accountability in lodging bonds as tenants will know if a landlord has not lodged it (with the landlord risking a fine which is an upset tenant's easy vendetta). Do not assume that IRD are not data matching with Tenancy Services Bond Centre. I would not risk that and risk the wrath of IRD - they are nasty bastards if you cross them and unlike most breaches of law they can apply their own penalties . . . and the b*stards would be on your back for the rest of your life.
Oh, in one of those instances where the person - an aspiring politician - was letting a house to their Mother and not declaring it went horribly wrong as a bitter family dispute erupted over other maters.

Thank you printer8. Seems the IRD do staring at screens but don't get out on the streets and ask.
Beating the feet and knocking on doors might show up more than we thought.
Otherwise, howdo you really know.

P8..I heard tax debt is the biggest cause of bankruptcy in NZ. Had a mate who had tons of rentals and after his ex wife and the IRD were finished with him he was close to broke. He thinks the ex dobbed him in, after she had received her half of course.

Karl
Agreed.
One thinks they are clever but when things turn sour being clever doesn’t count for much against bitterness and vengeance.
Can’t upset a mate or create any feeling of envy either. So easy to dob someone in on line.
Agreed - IRD have no hesitation in bankrupting individuals and businesses and they will relentlessly apply penalty fees and exorbitant compounding interest rates that will mean the original amount owed becomes insignificant.
Me? Too bloody scared to go down that track.

I've made use of the depreciation and interest rules myself. But I don't understand how one could get bankrupted over this stuff. Provided you have a half decent accountant and simply follow rules as they are written.

Fluffy...I seem to remember that about 30 years ago penalty interest was a whopping 10% every six months compounding. Imagine if you had avoided tax for about 4 years your debt would have doubled and if you could not repay it you would need to pay 21% PA of the total debt just to not get further in debt. Recipe for bankruptcy unless you have huge equity and sell assets to pay the debt.

@IRD chief: Please keep check on your team, these people are not performing their duties.

Being ignorant is also a type of corruption.

And anyone who thinks that IRD is not increasingly data sharing with a range of organisations and increasing their efficiency and tax take is fool.

P8..pretty sure a number of countries are collaborating on tax globally now too.

If we follow the pattern of other countries with this kind of onerous capital gains tax people will choose to hold onto their investment properties rather than sell, pay the tax and find they have insufficient funds to replace what they’ve sold, let alone upgrade.
The good news ( for investors ) is lower sales of intercity investment properties means less land available for developers, less building, less accommodation and therefore higher rents and eventually higher prices especially for those difficult to acquire inner city properties.

Because not having capital gains taxes worked out so well for us, right? I would hardly call the idea that someone who is speculating in property having to pay taxes on the gains 'onerous' but then again a mild breeze in an unfavourable direction is apparently a breach of property investor's human rights.

The less investors and move owner occupiers the better, and this helps that, so is a brilliant move.
Nothing more demoralizing than seeing a street go to the pack because investors have descended on it like vultures, and every second or more house then gets rented and hardly upkept or maintained.

Sounds like the state of Wellington. Aro Valley is a disturbing sight.

Yeah a street that has mostly owner occupiers always has a much better and friendlier feel to it than one with lots of rented houses, people get to know each other more, and the houses get looked after much better making the street in general look much better.
The more investors we can push out of the market the better as far as I'm concerned

So how long did that take? 15 moths for Jacinda to break her word and introduce a capital gains tax. You know that eventually the left just can’t help themselves, if you’re hard working, thrifty and have acquired assets of any kind they’ll be coming after you sooner or later.

13
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You realise that the BLT was brought in by the key govt. Right?

I do like a good BLT! No avo though, that is too extravagant.

And didn’t they campaign on no new taxes too? Of course in their case it was a token gesture to make it look like they cared about house prices but at 2 years it was completely avoidable; but I guess that has backfired in the end.

I don't see you complaining about how interest rates have halved, and are a quarter of what they were only about 11 years ago.
One of the main things a good government does is reacts to change.
When conditions have become so ridiculously favourable for investors, then they certainly don't need a subsidy to get even more rich like they had with the interest deductions.

As per treasury advise, amend the 10yrs to 20yrs for bright line, apply DTI, plug in the tax loophole, ensure the CullenCGT then put OCR to 3-5% straight away. If NZ keep treating housing as commodity, similar to such of tobacco, alcohol, gambling - then the vested interest? will always uttering 'supply' (be it supply more or less) which is basically the impossible mantra, more is the norm, less unlikely. Any Control Regulations attempt outside that, will be despise by vested interest team.

IRD must ensure 100% compliance and name & shame those who have broken the law.

Overseas sellers the problem. Overseas buyers aren’t a problem according to Hosking et al.

Why does IRD forgo chasing outstanding taxes? Do they need more funding to investigate and prosecute offenders?