Residential Property – We need to talk about Auckland

Residential Property – We need to talk about Auckland

Posted on May 20, 2015 by bnl

In the first of a series of updates about residential property in Auckland and New Zealand we discuss the recent announcement by Prime Minister John Key on changes to the way gains on residential property are taxed.

To begin with there’s actually some debate as to whether or not there is a problem with Auckland house prices. Given Auckland house prices rose 18% when overall inflation for the year to March was 0.1%, and in April the median house price to income ratio for Auckland was 8.36 times versus New Zealand’s overall ratio of 5.54 times (a median multiple of 3.0 times or less is considered affordable 1), it is difficult to see why there’s a debate.

In a pre-Budget release earlier this week, Prime Minister John Key announced (2) a number of new measures in the Budget aimed at ensuring that people buying and selling residential property for profit pay their fair share of tax.

The changes amount to clarifying the existing rules, under which anyone who buys property with the intention of selling for a gain is liable for tax. This will enable more effective enforcement by the IRD and introduce new rules to help track foreign investors.

The new measures will include:
• The introduction of a new “bright line” test to tax gains from residential property sold within two years of purchase, unless the property is the seller’s main home, has been inherited or transferred as a result of a relationship property settlement.
• A requirement for all purchasers of residential property, other than of the main home, to provide a New Zealand IRD number to Land Information New Zealand.
• A requirement for non-resident purchasers to have a New Zealand bank account and New Zealand IRD number.
• An extra $29 million for the IRD to fund compliance and enforcement.

The effect of the changes, which come into force from 1 October, will be twofold; one it will make it easier for the IRD to tax property speculators and two the Government will be able to collect more, and more useful, data about non-resident purchasers.

The “bright line” test is a clarification of the IRD’s current intention based test. Under the current rules, which will still hold regardless of timeframe, any gain from the sale of property which is purchased with the intention of making a gain is taxable at the seller’s marginal tax rate. The problem has often been proving intent.

Under the “bright line” test intention becomes irrelevant, at least for the first two years. If you buy and sell an investment property within two years, any gain on sale will be taxable as income. Subject to the few exemptions noted above, the IRD’s decision will be final and no correspondence will be entered into.

Critics have immediately identified the two year timeframe as a flaw that will be exploited by savvy investors who will merely hold on for two years and one day. What that ignores is that the current intention based rules still apply and the IRD will be getting an extra $29 million (on top of the extra $33 million it got last year) to enforce them.

Better data about non-resident purchasers will mean a clearer understanding of the impact non-resident purchasers are really having on the property market in New Zealand and pave the way for a withholding tax regime whereby the Crown can withhold tax at sale time from non-resident purchasers who sell within two years.

These measures are not the silver bullet that will take the heat out of house prices in Auckland, and the Prime Minister acknowledges that. Supply probably remains the best chance of addressing Auckland’s house price problems. But with investors (3), according to Shamubeel Eaqub of the New Zealand Institute of Economic Research, making 40%-50% of house purchases in Auckland these changes may make some difference.

What these measures really say is that the Government does see Auckland house prices as a problem and that they can’t rely solely on supply side measures to fix it. We think it’s a positive step and unlikely to be the last one.

In our next update about property in New Zealand we’ll write about the Reserve Bank’s efforts to “talk about Auckland”.

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