By Bernard Hickey
Prime Minister John Key has denied accusations that the Government's new two year 'bright line' test to force property traders to pay tax was a Capital Gains Tax in disguise.
He also denied the surprise announcement on Sunday of new measures to crack down on local and foreign property investors were poll-driven changes and an indication the Government was panicking over a housing crisis in Auckland. He did however acknowledge, for the first time, that foreign investors were 'rorting' the tax system by not declaring purchases.
The move to assume rental property investors who sell a home within two years are doing it to make an untaxed capital gain was announced on Sunday as part of Budget 2015, despite not being considered just six weeks ago.
Key told a stand-up news conference after the speech on Sunday that the tax measures did not amount to a capital gains tax and were simply a tougher enforcement of the existing rules applying to income from property trading.
"A capital gains tax is something that you pay no matter when you buy and sell the property. It doesn't matter whether you do that in three months, five years or 15 years," he said.
Key said on Morning Report that his comments in mid-April that there would not be any new tax measures for property investors in Budget 2015 were made before IRD advice came in on the 'bright line' test.
He told Paul Henry the changes were not a capital gains tax and that Auckland's property market was not a bubble.
"This is just part of the tightening up of the tax loop," Key said.
"We started really working on it six weeks ago, but we've looked at these things over the course of the last five years," he said.
'Undeclared foreign buyers a problem'
"We know there are people that come into New Zealand - IRD's advice to us is that number is increasing of people who are deliberately rorting the system," Key told Morning Report.
"Now I don't know know how big that is today - no-one's quite sure - but IRD says there's more activity happening there, and my main point is why should a non-resident be in a better position than a resident."
He later told Paul Henry the measures aimed at foreign investors was a major part of the announcement.
'PM forced to eat his words'
Labour Leader Andrew Little said the Government had finally reacted to the Auckland housing crisis after months of denial, but only after polling and focus groups had indicated voters also thought it was a problem.
"The stunning thing about this is that for months, if not a year, the government has refused to accept that there is a housing problem or housing crisis, especially in Auckland," Little said to reporters after the Sunday announcement.
"Now they've finally decided that the thing the Reserve Bank has said is a problem, the thing that every Aucklander has said is a problem, the thing that just about every bank has said is a problem, the government has now grudgingly, finally accepted is a problem," he said.
"Today, John Key has been forced to eat his words."
Little said the moves were tentative and incremental.
"It will take two-and-a-half years for this tax to fully come into effect. That is a long time to wait when Auckland house prices rose over $100,000 last year," he said.
"For years the Prime Minister has denied there is a crisis, refused to admit foreign investors are pushing up house prices and said there is no need to dampen down housing demand."
Key says rocketing house prices 'isn't new'
Asked on TVNZ's Breakfast if the policy was a 'U-turn', Key said supply was the best way to resolve the issue. He did not address the question.
"This isn't new, as I have said to you guys on many occasions. House prices doubled under Helen Clark's watch, they went up faster than us," Key said.
The REINZ-RBNZ Stratified measure of house price inflation in Auckland shows prices rose 77% between the November 1999 election of Helen Clark's Government and the November 2008 election of John Key's Government. Since November 2008, Auckland house prices have risen 87%. See the interactive chart below. Click on the Auckland tab for Auckland house price data.
'Crisis? What crisis?'
Key also denied there was a crisis in Auckland housing.
"House prices are rising faster than we would like but if you go to Sydney or Melbourne, or go anywhere in a major capital in the world and pick up the paper, I am telling you now, house prices are rising either faster or as fast and it is the main topic of debate," Key said.
"It's not new in a big metropolitan area. But what we announced yesterday does help, because we know people are rorting the system," he said.
Key pointed to NZ$33 million spent on IRD beefing up compliance with property trading rules, which had raised around NZ$250 million from people 'rorting the system.'
"So all we are saying is if you buy or sell an investment property within two years, you can kind of claim you were renting it out, but in reality you were there to make money," he said.
'Withholding tax for foreigners'
"And for foreigners, or non-residents (because it could actually be New Zealanders living in London on the big OE) but basically for non-residents we are going to get good information about you and you will have to pay your tax because we are going to withhold the tax if you sell the property and you're going to have to come and get it off us, as opposed to what we do at the moment, which is try and get it off them and we never can."
Key referred to a recent TVNZ news item profiling a property investor buying and selling properties quickly.
"If you were just a speculator and you thought you were going to rort the system - and you guys on your TV One news a couple of Sunday nights ago had a company on and the guy said 'We buy and sell properties within six weeks' and I was sitting there going 'these people don't even realise, because they are probably badly informed by it, by that information, that they don't have to pay tax'," he said.
"They do already have to pay tax and somebody's going to knock on their door. So what you are going to do is, genuine investors will still buy an investment property without doubt, but if your intention was to buy and sell quickly and actually rort the system and not pay tax you now know you'll be caught. I think that will free up some supply for more genuine other buyers."
'Big revenue earner?
Meanwhile, Key said the NZ$420 million expected to be collected from an extra NZ$29 million in tax compliance spending was before the impact of the new 'bright line' test.
"Our expectation is we will get $420 million - not even with the announcements made yesterday, just giving IRD more inspectors," he said.
Key also told Paul Henry the measures were also designed to better track foreign investors buying property here.
"What happens at the moment if a foreigner comes to New Zealand, a non-resident, and buys a property in New Zealand, sells it, makes a profit," he said.
"Even if they owe money we can't track them down easily. We don't have any information on them. So this will force them to give us an IRD number, a bank number and they will be withheld their tax. So I'm a non-resident, I live in Hong Kong or whatever, I come to New Zealand and I buy a house for half a million dollars and I sell it for $600,000, we will withhold probably 25% of that profit."
"So why change now?"
Asked why the Government had changed its position, Key said the IRD had changed its view on the 'bright line' test.
"They have changed their position. But I think these things actually help make the system a bit fairer," he said.
Asked why the Government had changed its mind in such a short period of time, he said: "In fairness we started really working on it six weeks ago - five, six weeks ago. But we'd looked at these things over the course of the last five years and IRD four or five years ago came back to me and said 'we don't like bright line tests for these reasons'," he said.
"When we recently pushed them on it, and a series of other things we looked at, some of them they said 'no'. This one they said 'yeah, we've changed our view'."
Little later said in a statement John Key needed to tell voters why he had had a sudden change of heart.
“The Prime Minister’s sudden rush of blood to his head followed his adamant denials last month that he would be making tax changes for property investors in this week’s Budget," Little said.
“And just two weeks ago he told journalists introducing a withholding tax for non-residents selling houses didn’t work in Australia; now the Government’s looking at it," Little said.
“It is panic stations at the Beehive. These are rushed and ill-conceived measures that experts have said will have negligible impact. Even the Government’s former tax advisor John Shewan says it won’t curb skyrocketing house prices or deter speculators," he said.
“These are the actions of a bystander Government that has watched the Auckland housing crisis unfold and then done too little too late."
'Proper Capital Gains Tax better'
Green Co Leader Russel Norman said Key was "fudging the record to try and justify his Government’s about-face on taxing capital gains.” Green Party Co-leader Dr Russel Norman said, pointing to Treasury advice from 2011 and IRD advice from February last year.
“Treasury has consistently supported a tax on capital gains, believing it to be a beneficial reform, and suggested a ‘bright line’ set at 10 years, meaning sales made within ten years of acquisition would be liable to a capital gains tax," Norman said.
“Treasury also highlight the difficulties a bright line test would create with people incentivised to sell assets just outside the timeframe the capital gains tax applies. A capital gains tax without a time constraint has benefits, as we have proposed," he said.
“National’s proposed two-year bright line test will create more distortions than a longer timeframe like ten years.”
'You could drive a motor home through it'
New Zealand First Leader Winston Peters said the Government's measures did not address foreign investment or migration as drivers of Auckland house price inflation.
His statement “we don’t always have good information about them” just about sums up his approach, Peters said, pointing to NZ FIrst's foreign buyers' register proposal in a private member's bill before Parliament.
“Mr Key scoffed at the idea, which is common sense in other countries but apparently not to him. Accordingly, his recent Damascus experience should be seen for what it is – a weak attempt to deal with a major problem," Peters said.
He said the 'bright line' rule was a joke.
"Expect the Companies Office to receive a torrent of applications for new property companies all in the name of virtually anonymous offshore property investors," Peters said.
“Mr Key and foreign-owned banks are on the horns of their own dilemma. The bubble can’t last. They can’t avoid the dire results of house price deflation and hundreds of thousands losing most, if not all of their equity, in over-priced homes," he said.
“Mr Key’s residential property gains net is so full of holes one could drive a motor home through it."
(Updated with Key comments on size of tax take and timing of change of view, Little saying Key must explain change of view, Norman pointing to distortions of bright line test, Peters saying the 'bright line' test was a joke)