IRD estimates Govt's trumpeted new tax on properties sold within two years will raise just $5 million a year in extra revenue

By David Hargreaves

The Inland Revenue Department estimates that the Government's new 'bright-line' test on property sales, announced with some fanfair as part of the Budget, will raise just $5 million a year in additional tax revenue.

This estimate is contained in the IRD's regulatory impact statement released this week in conjunction with the introduction into Parliament of the Taxation (Bright-line Test for Residential Land) Bill. The bright-line test targets properties resold within two years of purchase.

In order to give that $5 million revenue estimate some scale, according to Treasury figures the total tax revenue collected in New Zealand last year was $61.5 billion.

In the regulatory impact statement, IRD officials say the additional $5 million-a-year revenue estimate from the bright-line test is based on a number of behavioural assumptions, "which are inherently difficult to quantify, such as the number of sales that would be delayed in order to exceed the two-year holding period".

"The actual revenue collected under this option may be significantly more if the behavioural responses are different to those assumed," they say.

The officials also expect the two-year timeframe to be applied will cause "an economic distortion" because it will create a “lock-in” effect.

"In other words, it creates an incentive for people to hold property for longer than two years to avoid the bright-line test.

"For example, a person may avoid selling a property at the highest price, within two years to avoid the bright-line test. The person who is offering the highest price can presumably put the property to its most valuable use. This means that people may not undergo otherwise efficient transactions and put property to its most valuable use due to the bright-line test," the officials say.

Treasury and Inland Revenue released an officials’ issues paper on June 29, which sought submissions.

IRD says a total of 14 submissions were received.

"Three submissions supported the bright-line test and three did not support it. Submissions in favour of the bright-line test submitted that the bright-line test appeared to be a reasonable addition to the current intention test to ensure that property investors declare the income they are required to," IRD officials say.

"Submitters who did not support the bright-line test [found it] to be unprincipled and likely to only apply to persons who are forced to sell property due to circumstances outside of their control."

The officials say one submitter proposed reducing the bright-line period to one year, and one submitter proposed extending the period to 4-to-5 years.

However, the majority of submissions focused on the design of the bright-line test.

There were five main areas of concern raised by submitters. These were:

  • The start date of the bright-line period
  • The scope of the main home exception
  • Loss ring-fencing
  • The proposed land-rich company rule
  • Submitters also proposed new exceptions to the bright-line

"The majority of concerns regarding these issues was that the proposed design is not fully aligned with the current land sale rules. Submitters were concerned that the areas of departure would create greater complexity and they were typically not taxpayer friendly," IRD says.

"While officials accept that departure from existing land sale rules can cause complexity we consider that where the design of the bright-line test is not aligned with current land sale rules it is generally to ensure the bright-line test achieves its goal of being an objective, easy to enforce rule."

IRD says it's made several changes to the technical detail of the proposal in response to submissions and to address complexity concerns raised by submitters. These include:

  • Clarifying the time when a person’s ‘main home’ is determined
  • Clarifying the end date of the bright-line where there is no contract to sell the property
  • Limiting the definition of arrangement for residential land so that it only includes arrangements which the seller is a party to
  • Clarifying that bare land capable of being used for residential purposes is residential land
  • Creating a new ‘bright-line’ rule for habitual sellers
  • Enabling more trusts to use the main home exception by loosening the proposed restrictions on trusts using the main home exception
  • Defining what is a land-rich company and trust
  • Setting out what amount of change of ownership is required to trigger the proposed anti-avoidance rule

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19 Comments

Okay , why don't they just do a Capital gains tax , and say you get taxed as per the tax tables for your code on the gain ?

So I sell my house to downsize and get nailed

Its just plain dumb

It only applies to second homes or rentals, doesn't it?

Yes.

so far...

It would seem to be a Claytons tax- a tax you have when you don't want a tax, but to give the appearance of doing something about foreign buyers of property.
If at some stage the government do wish to collect tax on property without having a capital gains tax, I wonder if they will follow the British Conservative government's recent move to not allow deduction of interest as an expense.
The cat would be enjoying a pigeon feast there if it were not the conservatives who had brought the measure in.
http://www.telegraph.co.uk/finance/personalfinance/investing/buy-to-let/...

Hundreds of thousands of landlords and their accountants are digesting the impact of George Osborne’s shock tax change unveiled in the summer Budget on July 8.The tax increase, on which there was no consultation, will be phased in from 2017 and fully implemented by 2020. The change was unexpected, and the new regime is highly complex, so investors and their tax advisers are only now fully grasping its effects. Many investors remain unaware of the change, or underestimate its severity.
All higher-rate taxpayers who own buy‑to‑let properties on which there is a large mortgage will pay substantially more tax. Some current basic-rate taxpayers will also be hit, because the change will push them into the higher-rate tax bracket.

As a first-stage New Zealand could bring in and apply thin-capitalisation business-test rules on the debt-levels that could be interest-bearing for tax-deduction purposes on investment properties

Looks like the whole notion is being watered down to nothing.
In fact this tax will only make property dearer than ever because people will rather hang on and wait out the time than sell and risk tax.
If you want to hold prices down you make it easier to sell, not harder.
It would be much more effective to tax those who don't sell, rather than those who do.

It's not a tax earner at $5m. But would it really be that low? Just 180 sales say at an average $100,000 profit??

Perhaps a graduated tax rate depending on how low long you owned right up to 10 years would have been better.

That avoids the discrete "hold for two years" or "not" distraction. The benefit of holding off selling is too high, and the period is too short to prevent people holding off!

Indeed the gradual tax rate up to 10 years would have been MUCH better.

Agreed - the two year rule could lead to a 20% to 25% supply cut therefore prices rise even further than they would have without the rule. Unintended consequences!

The person who is offering the highest price can presumably put the property to its most valuable use. This means that people may not undergo otherwise efficient transactions and put property to its most valuable use due to the bright-line test," the officials say.

You've gotta laugh if this is the most important "insight" provided in their analysis.

Let's just 'test' this little assumption. Family of 7 (mum, dad and five kids) want to live in a 3 bedroom house, within walking distance of the children's school and parents work. They have a limited budget and offer $400K for said house. Single person, no kids wants to live in same 3 bedroom house. Single person will commute across town to work. Single person has an unlimited budget and offers $450K.

Which purchaser was therefore going to put said house to its "most valuable use"?

Encourage investors to hold past two years = reduced churn? I'm sure the real estate agencies will be thrilled with this :)

Perhaps this tax will only earn $5M a year over the next few years. The reason being that property values in Auckland are most likely going to fall for a few years so there won't be a lot of capital gain to tax.

a lot of people, IRD wanted 10 years min 5 years, it would not have captured the serious long term rental owner, instead national in their wisdom go two years, just long enough for speculators

I'd suggest you didnt want to capture the serious long term looking for positive cash flow landlord. So those making a living / business for a substantial part of their lives are OK I consider them "the real thing". The property gamblers buying hoping for a bigger fool in 6 months, yes get taxed, seems fair to me.

Lots more needs to be done to discourage landlords altogether, much more. Positive moves to highly favour the home owner/occupier are needed or NZ society will be utterly wrecked forever. There needs to be a figure to be aimed for to hold the number of rental properties, especially stand along houses, at. I am thinking no more than 20-30% leaning toward the lower number for stand alone houses and making a few concessions for rental apartments and those that offer long term leases that allow people to make homes in, and leases that can be transferred similarly to commercial ones.

you wont get those with both hands in the cookie jar(MP landlords) voting to put the lid on.
even though their job is to make NZ a worthwhile place to live, raise kids and do business

well all those wannabe FHB could just buy outside Auckland. stop pumping in cash and loans into public auckland, make it pay it's way on cash, stop selling to foreign sourced money, teired tax rate on multiple properties.

but where are the FHB going to get stacks of cash to turn into dead equity?

Great, in 5 years it earns almost as much as the flag change referenda cost.