The recent May Budget introduces a capital gains tax on residential property investment. If you purchase and sell a residential property within two years you will be taxed on any capital gain unless that property was used as your main home, the property was inherited or the property was sold as part of a relationship property settlement. We can add divorce to dying as a way of avoiding tax!

The new rules will apply to properties purchased after 1 October 2015 so the government will not benefit from any additional tax from residential property investment speculation for another two and a half years. For those who purchase a residential property, do it up and sell it within two years the taxable income formulae will go something like this: Sale proceeds less allowable costs. These being purchase cost, legal fees, commission on sale, renovation costs, rates, insurance and interest on any money borrowed relating to the property.

Publicly the Government state that the purpose of the change is to tax the “income” earned by foreign investors who are buying and selling properties in New Zealand (Auckland). These investors will now need to apply for a New Zealand IRD number, open a bank account up in New Zealand and declare their profits made from property dealing. Another reason touted is to dampen the Auckland property market and the new lending criteria announced by the Reserve Bank for Auckland property investors certainly adds credence to this intent. Hopefully a dampened Auckland property market will see the Reserve Bank drop our official cash rate which will lead to lower interest rates on loans / deposits and the weakening of our New Zealand dollar – both of which would be welcomed with shouts of joy from those in the financially stressed dairy sector.

You could argue that the new rules are not needed. Our tax laws already include an overriding provision that taxes any profit made from the buying and selling of residential property (or other asset) when the taxpayer brought the property (or asset) with the intention of selling it for a profit. And this does not have a two year time limit. But the difficulty of course is proving the intention. None of us buy property with the intention of selling it sometime in the future for a profit do we? Of course we don’t ……. not if it means that we will pay tax on that profit.

Are profits from residential property speculation a problem that warrants taxing? It would appear so. Nationally of the 86,000 residential property sales in 2014, almost 10% were for properties that were held for less than two years. In Auckland of the 31,000 residential property sales almost 15% were held for less than two years. Further if we apply the Stats NZ census figures for owner occupied dwellings 40% of these sales would be for properties that are not occupied as a main dwelling (and therefore subject to tax). That means 3,440 properties sold nationally would be liable for the new tax and 1,860 are Auckland based. Capital gain on these “taxable” properties sold amounts to $230M. If the average tax rate is 30% tax revenue would amount to $70M. But in practice the tax take would not be this high. The “allowable costs” mentioned above would be taken off the capital gain reducing the taxable income and the tax on this. Further some of the profits from property speculation have already been taxed under existing rules applying to those taxpayers that class themselves as property developers and those “honest” property speculators who fessed up under the current rules in place.

Will the new tax be successful as a revenue collector for the government? Probably not. Capital gain in Auckland has been exceptionally high in the past two years. This is not likely to continue so profits made by property speculators in a two year period are likely to reduce. No doubt property investors will avoid the tax by holding the properties for longer than two years or by living in the property so it can be classified as their main dwelling. And there is always the option of divorce for those particularly adverse to the prospect of paying tax.

Do I agree with the proposed residential property tax rules? Yes – but they are another example of the government ignoring the elephant in the room. Let’s face it residential property is not the only area where there is speculation happening. If it’s good enough to target residential property speculators what about share investors or anyone who buys an investment with the intention of a short re-sale at a profit. If any property or investment is brought and sold within two years I think there is a good argument that there is some form of speculation going on. That there was an intention to make a quick profit.

A tax system should be fair. And that means taxing income no matter how it is derived. All speculators should be taxed on the profits they make. The new rule should not just apply to residential property investment but to all forms of investment. There should be some exemptions like those that have been proposed with the residential property but they aren’t the only investors that should be targeted. And a two year time limit sounds about right to me. So let’s not ignore the elephant in the room. Let’s make the tax system fairer by strengthening up the rules that are already in place and apply these rules to all profits earned by those who choose to earn their income by speculating on the buying and selling of assets, whether these be residential assets or other classes of assets.

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