By Bernard Hickey
Prime Minister John Key has signalled that tax and property transaction data collected by New Zealand's IRD from non-residents in a crackdown on property trading here could be shared with foreign tax officials, including those from China hunting for corrupt expatriates with money invested in overseas assets.
Last December Key disclosed that Chinese President Xi Jingping had asked for New Zealand's help in tracking down a number of Chinese nationals who had fled to New Zealand with corruptly obtained funds. See our December article here.
Key yesterday announced a wide-ranging crackdown on local and non-resident property investors. It included a new 'bright line' test from October 1 that will means any capital gains from property sold within two years of purchase will be taxed fully as as income. Also, all non residents would have to provide passport details, foreign tax details, open a New Zealand bank account and obtain a local IRD number. Here's our Sunday article with the details of the crack-down and Key's denial this morning that it was a capital gains tax.
Key said the new measures would make it much easier for IRD to control a growing problem of non-resident investors not declaring trading income. He confirmed the information could be shared with foreign authorities and was aimed at full compliance with international rules on money laundering.
"Arguably yes, because the New Zealand bank account issue is all about fulfilling our obligations under the anti-money laundering rules," Key said when asked if information would be used to help China's crackdown on economic fugitives.
Key prefers a 'bright line'
Elsewhere, Key told a post-cabinet he had always favoured adopting the 'bright line' test, but that IRD had been reluctant until recently. He said Cabinet had preferred a three year threshold for the test, but that IRD preferred the two year threshold that was adopted. He said however that a 10 year or 20 year 'bright line' test, as was preferred by Treasury, would effectively be a capital gains tax.
"What they (IRD) basically say is, the further out you go, the more exceptions you have to have and we thought it was pretty clean and clear cut at sort of two years," Key said.
Asked if a 10-20 year bright line test was the same as a capital gains test, he said it would. "If you go for an infinite period of time then you are basically saying that you are going to tax capital on every transactions," he said.
Poll-driven decision?
He denied the Government had done any polling on the issue, but acknowledged that National's pollster Curia did regular polling on a variety of economic issues, including Auckland housing.
"We haven't done any polling on housing. Zero. I can't think of a single...we have our standard questions that we ask every single week and we have for years about economic development, but we didn't go out and specifically poll on this, or what would happen if we had a bright line test. We just don't do that," Key said.
Asked if Curia had polled on the issue, he said: "Not that I've seen. We just have the stock standard questions that we poll every week, and there's a whole range of questions within that, and there are questions about housing and the economy, but they are not specific about this stuff and they are not new. It's a slightly more elevated issue than it probably was a couple of years ago, but it's not the most elevated."
He said the Government had been having discussions with the Reserve Bank on the issue for weeks, but he denied that the Reserve Bank's April 15 speech calling for a reduction in the tax incentives for property was a direct cause of the latest crackdown.
"I think you have seen sustained price increases that have been a bit quicker than we would like in recent times, and the second point was that we started having discussions with the Reserve Bank, particularly around the speech that they gave, about what would be some alternatives," Key said when asked what had changed the Government's mind over the last five weeks and whether the Reserve Bank's April 15 speech had made a difference.
"They came up with the LVRs for investors. We thought this might complement that," he said.
'Unlikely to deflate Auckland prices'
He also said the Government's measures, along with the Reserve Bank's new LVR restrictions for Auckland landlords, were unlikely to deflate Auckland's property market, but may slow house price inflation, which was currently too high and not sustainable. He said the Government's measures were not a 'silver bullet'.
"We didn't model that number, or at least I didn't see any modelling," Key said when asked if the Government had done any modelling on the likely impact on house prices.
The Reserve Bank has modelled that its new LVR restrictions could reduce Auckland's annual house price inflation rate, which is the high teens at the moment, by two to four percentage points.
"The bottom line is a decent chunk of the houses that are bought are bought by people in the investor category and the rules for them changed yesterday. I would say a reasonable number, I don't know how large, but a number are bought by non-residents ,and the rules for them changed yesterday. And thirdly, I think there are people who, out of ignorance or deliberately, were cheating the system and they will certainly be on notice that the system has changed. So will it have some impact? My guess is yes. How much I don't know," he said.
He also said the Government had not budgeted for any additional revenue over the next four years from the new 'bright line' test, although its extra NZ$29 million of spending on IRD compliance activity due to be announced in Thursday's Budget 2015 was forecast to generate an extra NZ$420 million. A March 2010 Treasury briefing paper recommending a five year test estimated annual revenues of NZ$30 million by the fourth year of the policy.
"We haven't budgeted for any additional revenue as a result of the changes we made yesterday because we are taking an ultra-conservative view," Key said.
"Do I think we will get more revenue? The bright line makes it much clearer, much easier for IRD. They've got the $33 million we put into Budget 2013 and the $29 million we announced yesterday for Budget 2015. That's estimated to bring in $420 million. I suspect if we add into that what we are doing in terms of non-residents you will see a greater number but we just haven't budgeted what that might be," he said.
Key also reiterated the Government had no plans to introduce an Australian-style tax aimed specifically at non-resident investors, saying it would contravene Free Trade Agreements New Zealand had with Australia, Mexico and Japan.
He did say, however, that even though the Government did not plan a foreign buyers register, it would release the new IRD information from non-residents in aggregate.
"My preference would be to work towards releasing that information to you so you can see," Key said, adding however it may be difficult to separate out non-resident New Zealand citizens who are overseas on OEs.
(Updated with more quotes from news conference, details)
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