The Government will pass a law to exempt flood and cyclone-damaged homes from the bright-line test, which imposes a capital gains tax on investment properties.
Last month, Inland Revenue issued a guide to the bright-line property tax which outlined its interpretation of the law as introduced by National in 2015 and revised in 2021 by Labour.
The bright-line rule was intended to act as a capital gains tax on property investors and it excludes the family home. It was first a two-year test but has been extended to 10-years.
However, the IRD issued an interpretation document in May outlining its view on what could be considered a person’s “main home”.
The tax commissioner ruled if someone was absent from their property for more than 12 months, that was a strong indication they were no longer using it as their dwelling.
This would mean if a homeowner left their property for longer than one-year, it would be subject to the capital gains tax if it were sold. Even if the owner kept it as a ‘family home’.
Homeowners who have been displaced by Cyclone Gabrielle and the Auckland Anniversary Weekend floods could plausibly be caught by these rules and have the tax imposed on their house.
This could apply to those who have to leave their house to make repairs, or those in high-risk areas who are waiting to receive a voluntary buyout.
On Wednesday, Revenue Minister Barbara Edmonds announced legislation would be passed to make sure the latter group would not be inadvertently caught by the tax rules when local authorities buy-out damaged properties in Auckland, Hawke’s Bay, Tairawhiti, and other regions hit by severe weather events.
The exemption will apply to all types of properties and owners, not just those who have been absent from their family homes.
For example, a person who owns a rental property in a high risk area will not be subject to the bright-line test, even if they have owned it for less than 10 years.
“The Government is clear that it isn’t appropriate to apply the bright-line test to these property sales because the impact of weather events gave the property owner little option other than to sell to the local authority,” Edmonds said in a press release.
Officials from Inland Revenue and the Cyclone Recovery Unit have been working on a fix since the voluntary buyouts were announced. A supplementary order paper will make the changes via a broad tax bill already before Parliament.
“The amendment will ensure the bright-line and other time related tests do not apply following a Government or local authority buy-out of a North Island flood or cyclone-affected property.”
Ordinarily, the bright-line test applies to properties like second homes or rental properties where profit is taxable if it is sold within 10 years of purchase, or five years under the previous test.
Nicola Willis, the National Party’s finance spokesperson, said the extended bright-line test was a “capital gains tax by stealth”.
A family could have to pay capital gains on the sale of their home, just because one parent had to move out for more than 12 months because of work or a family illness.
Edmonds retorted that the law had been introduced by the National Party and the same situation would have been caught under their rules.
“I absolutely refute the mischaracterization by that member who says that there is a capital gains tax by stealth. There is no capital gains tax in New Zealand on the family home.”
Willis said National would roll the bright-line test back to just two years. While these absences would still trigger the rule, owners could just wait out the two-year threshold before selling.
Rolling back the tax isn’t enough for the Taxpayers’ Union, however. The small government pressure group wants the bright-line test scrapped altogether.
Callum Purves, the group’s campaigns manager, said the National Party had opened a back door for a capital gains tax to walk through.
“When John Key’s Government introduced the bright-line test in 2015, this was the start of a slippery slope,” he said.
“As many warned at the time, the IRD’s reinterpretation of Labour’s 2021 amendment to the test now means that working Kiwi families can be taxed on the value of their family home.”