The ins and outs of the proposed tax on property sales
Despite some recent evidence that the natural forces of supply and demand are seeing some application of the brakes on the accelerating housing market, there is still concern about its speed. As we all hurtle along the highway to housing hell (or heaven, depending on your circumstances), the Government’s proposed speed bump moved a step closer with the reporting back to Parliament earlier this month of the Taxation (Land Information and Offshore Persons) Bill.
As the name suggests, the main thrust of this legislation is to provide a register (that’s not officially a register) of foreign buyers of New Zealand land. The rules will include some new tax concepts that will also affect the proposed bright-line test, which will charge tax on sales of property that occur within two years of the date of acquisition.
From 1 October, all land registrations will need to be accompanied by a “tax statement”. Both the vendor and the purchaser will need to provide a statement unless the transfer is “non-notifiable”. This generally means a situation where the land will be (for the purchaser) or was (for the vendor) used as the “main home”. The exemption won’t apply where the “main home” exemption has been relied on at least twice in the two preceding years or to trustee owners.
“Main home” will be an important new definition, as it is likely to also apply for the purposes of the bright-line test. It will mean the one dwelling that is used by a person as their residence. If they have more than one home, then it will be the one they have the “closest connection” with. Difficulties will arise where a person owns more than one home. This won’t only affect holiday homes but also those who own a second home for family members, such as semi-independent student children. Indications are that where a settlor of a trust has a “main home” in their personal name, then any property owned by that trust will not be able to apply the exemption.
Certain details must be provided for notifiable transfers. These include an Inland Revenue tax number, advice of citizenship or residency status and any foreign tax residency status and, if applicable, the person’s foreign tax number. If the person does not have a New Zealand tax number, they will have to get one. An “offshore person” will only get a tax number if they provide details of a New Zealand bank account to Inland Revenue. In this context, an offshore person will mean a New Zealand citizen who’s been out of New Zealand for three years, a person with residency who’s been out of New Zealand for 12 months, and anyone who is neither a citizen nor has residency. Any offshore person who already has a tax number will need to provide details of a New Zealand bank account to Inland Revenue if they haven’t already done so.
So – a whole lot of extra compliance. The real question is whether it will have any effect on the housing market. Certainly, it will provide a clearer indication of who’s buying land than a list sorted on the assumed ethnic origin of buyers’ surnames. The tax information provided will also provide an easy reference point for Inland Revenue to apply the two-year bright-line test. But it won’t prevent foreigners from buying land unless they are already restricted by other regulations (such as the Overseas Investment Office requirements).
As for the bright-line test, will it stop speculators? Surely they are savvy enough to see the benefit of holding on for at least two years to stay out of the regime, the main risk being an intervening property market slump. What’s more likely to happen is that a number of people not covered by the exemptions for the family home, inheritances and relationship property transfers, are going to be adversely affected. For example, there is no proposed exemption for financial hardship, such as exists for an early KiwiSaver withdrawal.
In a number of respects, the proposed changes represent an overly fast, knee-jerk reaction to a perceived and only anecdotally proven problem. That generally bodes poorly for the effects of tax changes that result.
