Article authors: Phil Barlow, Tax Director, and Shelley-Ann Brinkley, Associate, Hayes Knight* The article was first published in Taxation Today Vol.86.

Reining in Auckland's property market

The property market, and in particular the Auckland housing market, has in recent times been a very hot topic for both media and residents alike. New initiatives from the Government, including a “bright-line test”, are an attempt to ease concerns around this heated market.

In search of equitable solutions

Many people will have directly experienced the blunt end of the residential property market when trying to buy a house. If not directly buying or selling, many of us will have otherwise heard of the experiences of friends, family and colleagues who have turned up to auctions where the starting price is $100,000 or more over the recently issued QVs. In this regard, the author is surprised the Auckland Council has not picked up on the idea of amending property rates to the value of a property that has just sold. It would seem that might be a more equitable way of them squeezing more revenue from the ratepayers than pushing rates up across the board.

Anyway, this brings us to the latest changes that were announced as part of the Government Budget on 21 May 2015. Once enacted these changes will apply to property bought on or after 1 October 2015.

The bright-line test

The proposed changes (which some are suggesting is a dressed up capital gains tax) will introduce a “bright-line test” that will tax any profit on the sale of residential property where the property has not been owned for two years.

There will be exceptions to this bright-line test where the property is the seller’s main home, inherited from a deceased estate, or transferred as part of a relationship property settlement. Clearly it seems there is some complexity around this, particularly in relation to the “main home”. It appears that based on the Officials’ Paper released on the bright-line test, Bright-line test for sales of residential property (June 2015), the main home exemption would only apply to one property at a time.

Anecdotally, if the media is to be believed, some buyers are already looking to get a jump on these rules by bringing forward purchasing their property before 1 October 2015. Whilst it seems there is an expectation some people may work around this magical two-year period, in a wider context a process will be put in place that will easily capture land transactions as they take place.

Capturing land transactions

This is to be done by way of requiring the investor to provide a New Zealand IRD number as part of the land transfer process. In addition, non-residents will need a New Zealand bank account number in order to be able to buy a property. A non-resident for the purpose of being issued with an IRD number will be defined as an “offshore person”. In essence this will be a person that is not a citizen or permanent resident.

These two requirements are now contained in the Taxation (Land Information and Offshore Persons Information) Bill 2015 (34-1) introduced on 22 June 2015. This information will be collected by conveyancers from property vendors and purchaser and provided to Land Information New Zealand which in turn will provide the information to Inland Revenue.

All non-resident buyers and sellers must also provide their Tax Identification Number from the home country along with current identification such as a passport.

Bolstering existing tax rules

Since the announcements were made, many commentators have pointed out the New Zealand tax legislation already has a wide set of rules around the taxation of land transactions. Specifically, there is a rule that taxes the gain on sale when a property has been acquired for the purpose or intention of resale. In reality, this rule is particularly hard for Inland Revenue to prove and equally may prove challenging for the taxpayer to disprove in some circumstances. The proposals therefore appear to bolster these tax rules.

Withholding tax changes and details to date

As a further measure, consideration is being given to whether withholding tax should be deducted from the proceeds of sale by a non-resident, unless that person can prove the property was their main home. It seems this measure is being considered to counteract the difficulty of recovering and policing tax on land transactions when the vendor is located outside New Zealand and may be situated in a country to which enforcement is problematic. In addition the vendor’s location may not be easily identifiable.

The way the withholding tax is likely to work is that it would be automatically withheld where a non-resident sells a residential property. The non-resident would then need to apply for a refund from Inland Revenue of the withholding tax if, for example, they can prove the property was used as their main home.

As it stands however we are still light on the detail as to how this withholding tax may actually work, particularly around withholding rates, who is responsible to deduct and pay the withholding tax, etc. There is therefore a lot more work that is required before any withholding tax measure is introduced. Any such changes are unlikely to be introduced until mid-2016.

IRD to set up more specialist property teams

Also of note is the fact that the May 2015 Budget allocated a further $29 million to Inland Revenue to assist them to target land transactions. In previous budgets, Inland Revenue has been allocated significant sums to target property transactions. This has resulted in Inland Revenue setting up specialist property teams. These teams have already proven to date that this area produces a big return to the Government in terms of tax discrepancies identified.

An officials’ issues paper was released on 29 June 2015, seeking feedback on the bright-line test for sales of residential property. More details of these property measures will no doubt come to light leading up to the changes being enacted.

The authors welcome any questions or comments on these proposed changes, please email:  phil.barlow@hayesknight.co.nz or shelley-ann.brinkley@hayesknight.co.nz .

*Phil Barlow is the Tax Director of Hayes Knight North Ltd, a Chartered Accountancy practice based in Auckland.  He provides specialist tax consulting services including tax effective structuring, tax risk management, IRD audits, domestic and international tax advice and tax due diligence.

Phil manages the day to day operations of Knowledge Shop NZ Ltd and regularly presents on topical tax issues to Knowledge Shop members and other Auckland based Chartered Accountancy firms.  He and his team author Tax Examples and Scenarios, published by Thomson Reuters.

Within NZICA, Phil is Chair of the Auckland Branch Operational Tax Liaison Group, a member of the Auckland Branch Tax Committee and a member of the Auckland Public Practice Committee.

Phil can be contacted at phil.barlow@hayesknight.co.nz;  or +64 9 414-5444