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