Last week, New Zealand’s parliament passed legislation to extend the “bright line test” out to five years, thus ensuring that if a speculator sells a rental property within five years they will pay income tax on the capital gain. From Interest.co.nz:
The bright line test – which requires tax to be paid on any gains made from a residential property sale – was first imposed by the National-led Government in 2015.
The Labour-led Government has argued the measures don’t go far enough and that extending the test to five years will help deter property speculators and “may” have of a dampening effect on the housing market.
National opposed the changes, despite it being a bill that “in the normal course of events, we very much would have been supporting,”.
“But we cannot support this bill because of the egregious, and I think in fact duplicitous, way in which a stealth capital gains tax is being imposed on New Zealanders through this legislation.”
The Government is also seeking to reform negative gearing by ‘ring-fencing’ investors’ losses on residential property so they cannot be offset against unrelated wage/salary income:
An Issues Paper has been released by the Inland Revenue Department on the proposal to change the rules in what the Government says is “an effort to level the playing field between speculators and investors – and home buyers”.
IRD is proposing that the new rules will apply from the 2019-20 tax year and will mean that investors will no longer be able to offset losses on property investments against their other income. It’s not definite yet that the new rules will be applied in entirety from April 1 next year as the IRD says it would be possible to phase the rules in over a two or three year period (by gradually reducing the amount of losses that can be applied against other income). However, the IRD appears to favour applying the rules in entirety from next year.
Revenue Minister Stuart Nash, in “encouraging feedback” on the proposed changes, says the “persistent tax losses” that many property investors declare on their investments indicate that they rely on capital gains to make a profit..
The changes will “make the tax system fairer” Nash says…
“In conjunction with the recently announced extension to the bright-line test, ring-fencing losses from rental properties would make property speculation less attractive and level the playing field between property investors and home buyers. The time is right to test the detail of this proposal with investors and other stakeholders,” Nash says…
IRD is suggesting that the ring-fencing should apply on a “portfolio basis”, which means that investors would be able to offset losses from one rental property against rental income from other properties – calculating their overall profit or loss across their portfolio.
Also under the suggested changes, a person’s ring-fenced residential rental or other losses from one year could be offset against their residential rental income from future years (from any property) and their taxable income on the sale of any residential land.
These reforms by NZ’s Labour Government are similar (but more comprehensive) than those proposed by Australia’s Labor Opposition, which has promised to disallow negative gearing on existing properties only from a certain date (while grandfathering current investors), while halving the capital gains tax discount to 25%.
In both nations, it’s the centre-left parties taking the lead on housing reform.