Nats' backdown: tougher tax rules for capital gains, foreign investors on the way

LATEST: Budget 2015: Big questions hang over property tax U turn

Next week's government budget will include extra measures to ensure people buying and selling residential property for profit – including overseas buyers – pay their fair share of tax, Prime Minister John Key says.

The new measures will include:

• Introducing a new “bright line” test to tax gains from residential property sold within two years of purchase, unless it’s the seller’s main home, inherited or transferred in a relationship property settlement.  The “bright line” test adds to the current IRD “intentions” test, and property bought with the intention of being sold for profit will still attract tax even after the two-year cut-off of the new test.
• Requiring non-residents and New Zealanders buying and selling any property other than their main home to provide a New Zealand IRD number.
• Requiring non-residents to have a New Zealand bank account to get a New Zealand IRD number.
• Providing Inland Revenue with $29 million extra funding for compliance and enforcement.

Labour's Jacinda Ardern and Michael Wood were quick to imply National had appropriated Labour's capital gains tax policy from last year's election, which ironically new leader Andrew Little has "parked."

"I think we claim this as a win," Mr Wood tweeted. However, he noted it was not clear what level the tax would be set at. 

However, NBR economics editor Rob Hosking says, "This isn’t a capital gains tax and it is a bit of political mischief to call it a capital gains tax.

"But it is a backdown, both on how investment property is taxed and on overseas buyers of property."

Only a few months ago National said no change was needed in either area. It is quite a major U-turn  by National to bring in these changes now, Mr Hosking says.

"It also looks a bit panicky: why not wait until Budget Day this Thursday?," he adds.

A welcome about-face
The move to identify foreign buys follow comments from Reserve Bank Governor Graeme Wheeler on Thursday (after prodding from NBR) that it would be "helpful" if the government finally set aside its objection to collecting data on foreign home buyers. Finance Minister Bill English has previously rejected any form of tracking as impractical and ineffective. 

Mr Key's comments follow those by Immigration Minister Michael Woodhouse yesterday who said the government was considering awarding points to immigrants who pledged to settle outside Auckland under the points-based entry system.

Extra IRD funding
The extra $29 million of spending for IRD brings the department's total spending on chasing property investors over the next five years to $62 million and is forecast to generate about $420 million of extra tax in that period.

In a joint statement, Finance Minister Bill English and Revenue Minister Todd McClay said $33 million of extra funding for the purpose provided to IRD since Budget 2010 had generated an extra $258 million of assessed tax revenue up until March this year, a return of more than $7.80 per dollar spent.

Mr McClay says the extra information disclosure requirements for property buyers will help Inland Revenue track and identify transactions that are likely to be taxable and would allow IRD to share information about non-residents with overseas tax authorities.

Slam from Little
Labour Leader Andrew Little slammed the government’s budget plans, saying “John Key’s weak measures to rein in the astronomical profits property speculators are making are an admission, finally, that there is a housing crisis says.”

“The Prime Minister is creating a massive loop hole with his new ‘bright line’ test which will exempt speculators who hold onto their properties for longer than two years,” Mr Little said.

“A tax which only applies to sales within this arbitrary period will not deter the land-bankers and will only capture the small number of short-term buy-and-flick speculators.

“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.”

Designed to take head out of Auckland property market
The changes come after the Reserve Bank last week announced new lending restrictions targeting Auckland and aimed at taking some of the heat out of its housing market, in which the median price rose by 17.7% in the year to April, according to the latest statistics from the Real Estate Institute of New Zealand. The central bank's measures include new lending limits on property investors in the Auckland Council area from October, requiring them to have at least a 30% deposit.

The tax measures announced today are “expected to take some of the heat out of Auckland’s housing market and sit alongside the Reserve Bank’s latest moves to address associated financial stability issues,” Mr English says.

“Taken together, they will help Inland Revenue enforce existing tax rules, provide it with extra resources and ensure that property investors pay their fair share of tax – whether they’re from New Zealand or overseas.”

No CGT but tighter rules
“People calling for a new capital gains tax often overlook the fact that, under existing rules, anyone buying property with the intention of selling for a gain is liable for tax on that gain,” Mr Key told the National Party’s Lower North Island regional conference in Lower Hutt today.

“Everyone – whether from New Zealand or overseas – should pay their fair share of tax according to the law. So we need to ensure the existing law is enforced.”

The changes will be subject to consultation and take effect on 1 October this year. The “bright line” test will apply to properties bought on or after that date.

“These measures will not affect New Zealanders’ main home, although existing tax rules will still apply in addition to these new steps,” Mr Key says.

“They are aimed squarely at ensuring that property buyers – including overseas speculators – who buy residential property with the intention of selling for a gain pay their fair share of tax as required by the law.

“It’s not unreasonable to expect that if you buy an investment property and sell it for a gain within two years, then you should be taxed on that gain.

“This is quite different from an investor buying with a long-term view of renting their property to tenants. And it’s completely different to New Zealand owner-occupiers who have worked hard to buy their family home.”

Mr Key says that while the current law is clear about taxing property gains, decisions often rely on the intent of the buyers or an assessment of their intentions by Inland Revenue.

“One of the reasons this has become an issue, particularly with overseas investors, is that we don’t always have good information about them. And some overseas investors can be difficult to track down – even if Inland Revenue knows they owe tax.”

Mr Key says New Zealanders would expect Inland Revenue to apply the same tax rules on overseas property investors that are applied to New Zealand property buyers.

“That same requirement must also apply to overseas residents. The government welcomes overseas investment but, in return, those investors must follow our rules when it comes to tax,” Mr Key says.