NZ Labour Government takes aim at property speculators

By Leith van Onselen

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.

[email protected]

Comments

  1. People will, of course, now just wait the full 5 years. I suspect that the average holding period for specufestors isn’t lower than than anyway.

    Yes, there are outliers where people buy and sell within a few years, but the core is made up of HODLers. Makes sense too, why wouldn’t you HODL something that does a solid 20% per year.

    • It’ll be interesting to see if the holding period has an effect — certainly the risk/reward profile changes, but is the average specufestor smart enough to appreciate that?

    • By default, the tax will be a withholding tax within the 5 years ie: an Income Tax amount will be deducted from sales proceeds at settlement, and it’s up to the vendor to prove the intention of the property wasn’t to make a capital gain if they want that amount refunded ( lying is a handy trait in New Zealand!). But after 5 years? It doesn’t matter! If the intention can be proven by the Tax Department that capital gains was the intention, then income tax is still payable, no matter whether the vendor has held the property for 1 year, 5, 10 or however long.

      • That last bit will never happen.

        Australia has a similar rule – the 50% CGT discount doesn’t apply if the intention is “profit-making”, but people buy, develop and re-sell every day paying only the discounted tax amount. It’s unenforceable.

      • I agree with you. That’s why I support a blanket income tax on ALL property transactions. Make a capital gain on sale? Pay tax – end of story. “But what about all the renovations I’ve made? I should be able to allow for those” is often the retort. Well tough, I say! If you put in a new bathroom for 20 grand, make sure it will add 30 to the end sale price to cover the cost of Income-tax payable…..
        Or “But why should people pay tax on the Family Home! It’s already been paid for with after tax dollars”. If the property market stays stable, no tax will be payable in any case. If it increases a tad, then the tax payable is negligible in the grand scheme of things (NB: NZ doesn’t have Stamp Duty or CGT as such). But if the market booms, as it has, then income tax is assessable – the stick to calm the market down.

      • (Afterthought: If you’re a high-income earner selling a high-value property Income Tax will probably be at 30%. But if you’re a low income earner, selling a modest property, Income Tax can be as low as 10.5%)

      • “Well tough, I say! If you put in a new bathroom for 20 grand, make sure it will add 30 to the end sale price to cover the cost of Income-tax payable…..”

        Correction – no tax payable if value only goes up by $20k. Because the spend would go into the cost of the property.

      • drsmithyMEMBER

        Or “But why should people pay tax on the Family Home! It’s already been paid for with after tax dollars”.

        I don’t know about the after-tax dollars bit, but I think people having to take a downgrade of family home because they want to move across town is a bit rough.

        I’m OK with a CGT exemption for buying another family home within, say, six months of selling the existing one. But I also think that any access of “equity, mate” through refinancing to a higher amount (or using appreciation as security for another purchase) should trigger a CGT event.

    • Well dont interest only loans need to be renewed every 5 years or so ? so the timing would be just right to hold onto the property for that length of time. Aside from the already listed reforms proposed for NG changes i would love to see deductions on so called rental properties being given a internal rectal exam by the ATO. It should be the owners responsibility to prove the properties are being genuinely rented. They should be required to provide rental reciepts to prove the house is being rented and only allow deductions for the periods it is actually being lived in by a tenant. In additon deductions should be disallowed if the property is listed at a price for rent that is outside market expectations. None of this listing an outrageous rental price to keep it empty and still claim deductions.

    • The ring-fencing plan would arguably have the greater impact. The five year bright line proposal makes sense but would be difficult to manage and relatively simple to avoid. Our ALP should take note that the NZ proposals target property investment whereas the ALP proposals (in typical fashion) broad-brush all investment categories. If you are going to argue that property is a special class of asset (which it clearly is) then the policy response should also be specific.

  2. Leith, keep doing great job – this is (most likely) the only news business portal in Aus/NZ worth following. I lived in 6 countries and have never seen so much cra* like in Ausssie mainstream media.

  3. In the past (70s) NZ had speculative capital gain tax on resales. Tax rate was up to 90%

    In the our age of neoliberalism even taxing speculation at normal rate look communist

  4. … ENOUGH TINKERING … SOUND STRUCTURAL REFORMS REQUIRED … URGENTLY …

    The tax initiatives are largely tinkering / tweaking … on top of the farce that is KiwiBuild / dim-witted dense development..

    First Housing Minister Twyfords own officials (following an OIA request by Newshub) found Kiwibuild seriously flawed … reported by Newshub late February …

    Doubts over KiwiBuild’s affordability: MBIE … Newshub

    http://www.newshub.co.nz/home/politics/2018/02/doubts-over-kiwibuild-s-affordability.html

    … with follow – up volleys coming from all directions …

    Mike Hosking: KiwiBuild ‘suburb’ will look like a dump in a decade … Mike Hosking … NZ Herald

    http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=12020092

    4,000 houses in 29 hectares … Kiwiblog

    https://www.kiwiblog.co.nz/2018/03/4000_houses_in_29_hectares.html