Budget 2015 bring new property tax rules

The Government will give extra $29million to the IRD in Budget 2015 for the property tax compliance activities. This is mainly to ensure property speculators also pay their fair share of tax, which is currently by enlarge being avoided.

The new rules will come in to effect from 01-10-2015:

1. All New Zealander and non-residents will need to supply their IRD number at the time of property transactions(buying and selling) other than their main home(principal place of residence)
2. New rules will have compliance with anti-money laundering rules, all non-residents must have New Zealand operational bank account.
3. Bright line test will come in to effect, which is in addition to current intention test of the IRD.
4. Under the bright line test, if the property is sold within 2 years, then any gains made out of the transaction must be included in the tax return.
5. The Bright line test will work as a supplementary test to intention test. There is no time limit on the intention test, as long as the there was an intention to make profit the intention test comes in to effect. According to the intention test, if there was an intentions to make profit then income tax must be paid on any gains made from selling the property.
6. However, the intention test has been a very subjective matter, and the Bright line test supplements it with an objectivity.
7. The new test is being put into place to ensure existing law is strengthened and enforced.

Bright line test

This test will require income tax to be paid if a residential property is bought and sold within two years, unless it is the seller’s main home.
If a property is sold within two years, then the tax will be paid on any gains made from the sale. There are some exemptions such as seller’s personal home, inherited property and relationship property settlement.

Implementation

The IRD will have much information around this prior to the implementation (01 Oct 2015). However, this may be little harder to implement in practical terms, as people may delay selling the property and wait for two years before they sell.
Intention test has always been a subjective matter, the bright line test gives little more tools to the IRD to implement property related tax. But in the absence of full fledge capital gain tax, will this help to curb property speculators, only time will provide answer to this question