New Zealand introduces new property tax measures to address rising house prices

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1 19 May 2015 EY Library Access both online and pdf versions of all EY Global Tax Alerts. Copy into your web browser: Services/Tax/International- Tax/Tax-alert-library#date New Zealand introduces new property tax measures to address rising house prices Executive summary On 17 May 2015, New Zealand s Prime Minister John Key announced a range of property tax compliance measures to ensure that New Zealand property buyers and overseas investors alike pay their fair share of tax. 1 The 2015 budget, which is set to be released 21 May, will include a number of new measures to bolster the laws around the taxation of property transactions. The measures include establishing a bright line test that will tax any capital gains made from the sale of an investment property owned for less than two years, introducing transparency measures particularly aimed at nonresident investors, committing to an extra $29 million of funding for Inland Revenue to increase its property tax compliance activities, and introducing a withholding tax for nonresidents selling residential property. The tax will apply to the full gain at the taxpayers marginal income tax rate, most likely 33%. Detailed discussion Measures to focus on Auckland house prices and foreign investors The focus on the property tax rules comes amid increasing concerns over untaxed property speculation and pressure to tackle the Auckland housing market s burgeoning prices. Although Finance Minister Bill English and the Prime Minister are wary of labelling the situation a housing crisis, New Zealand property prices are among the least affordable in the world and continuing to climb, particularly in Auckland, where the median price rose by 18% over the year ending April It is not possible to know the extent to which foreign buyers are influencing this trend, but there have been increased calls from the Opposition to address a perceived problem of short-term buy-and-flick speculators, especially nonresidents, avoiding

2 the current rules, which require tax to be paid on properties acquired with an intention to make a gain on the sale. It appears that the Government has been forced to take swift action ahead of the budget to address the increasing concern surrounding property prices. The new measures, which Revenue Minister Todd McClay has admitted were only developed over the last four to five weeks, have been labelled by opposition leaders as a U-turn and a weak and overdue move to take action. Until now, the Government has focused on measures to boost housing supply and decried the relevance of tax as a factor in rising residential property prices. The Prime Minister maintains that that fixing supply is still the priority, with this announcement appearing to be a rushed development in the face of public pressure and tighter restrictions over mortgage finance announced by the Reserve Bank of New Zealand. 2 It leaves many issues unresolved. Many issues still left in the dark by bright line test The bright line test will tax property buyers on any capital gain that they receive from the sale of a property owned for less than two years. The test won t apply to the seller s main home, inherited homes, or homes transferred in a relationship property settlement. The new test will come in to force for properties purchased after 1 October At present, income tax is charged on property gains where there is an intention to resell on purchase. This test will continue to apply. Property investors correctly returning income under the current rules will be unaffected. Nevertheless, enforcement of the existing test has proved difficult, with evidence of intent proving elusive. Poorly advised investors may seek to avoid tax by sitting on investment properties for just over two years, despite the existing law remaining applicable to such transactions. The announcement of a bright line test belies its complexity and uncertainty of application. For instance, the Government is yet to illuminate how the bright line test will define the seller s main home, or whether the test will apply to family homes held by a family trust. If left unresolved, these issues could present significant opportunities for avoidance. The Government will also need to resolve how losses on the sale of properties are to be treated; if gains on the sale of properties are to be taxed more aggressively, does this signal that losses on the sale of investment properties are to become deductible? Transparency measures could increase compliance costs for nonresidents New transparency measures will target property transactions, in particular those involving nonresident buyers. They will require nonresidents to supply New Zealand and home country tax identification numbers as part of the property transfer process. With this requirement comes an obligation for nonresidents to fulfil the preconditions for obtaining a New Zealand Inland Revenue identification number, including the requirement to have a New Zealand bank account. The aim of the extra information is to make it easier to identify sellers, to track down overseas investors, and to reduce the presence of special purpose vehicles that set up temporarily in New Zealand to sell properties. The requirement to open a New Zealand bank account aims to ensure that nonresidents are subject to the full anti-money laundering rules. On the face of it, the requirement to open a New Zealand bank account before an Inland Revenue number is obtained will impose significant compliance costs on taxpayers with only a fleeting, short-term requirement to return income tax in New Zealand, such as nonresident contractors. Further detail on how this measure will work in practice will be required. Additional funding following successful return on 2010 compliance investment The Government has committed to an extra NZ$29 million of funding for Inland Revenue to increase its compliance activities, particularly around property speculation in Auckland and Christchurch. Combined with existing funding, this is expected to generate around NZ$420 million over the next five years. 2

3 The Government s commitment to better education and enforcement is positive, as the somewhat unfair public perception of Inland Revenue s failure to explain and enforce the existing rules, have partly undermined the integrity New Zealand s tax system. New withholding tax announcement is withholding on the details The Government is also looking to introduce a withholding tax to apply to nonresidents selling residential property, but has offered very few details as to how this would operate. The withholding tax is likely to be introduced mid-2016, following consultation. For now, questions remain over the applicable rate of tax, how the withholding tax would interact with New Zealand s network of double tax agreements, its application to property holding companies, situations where a resident becomes nonresident, or how the tax will deal with the use of related parties to avoid triggering the tax. Estimates of the revenue anticipated are not yet available. The Government has committed to consultation on the withholding tax design, but has not yet advised when it intends to offer more details on the operation of the tax. Next steps An issues paper due to be released in July 2015 will look at the bright line test and the Government will introduce legislation by late August Endnotes

4 For additional information with respect to this Alert, please contact the following: Ernst & Young New Zealand, Auckland Aaron Quintal aaron.quintal@nz.ey.com Ernst & Young New Zealand, Wellington Geoff Blaikie geoff.blaikie@nz.ey.com David Snell david.snell@nz.ey.com 4

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