Auckland chartered accountant Leicester Gouwland of William Buck Christmas Gouwland today repeated his call for the numerous unfair aspects of the proposed bright line test for residential property to be amended. Harking back to David Lange’s utterance of January 1988, Gouwland suggests it is time to sit down and have a cup of tea. Gouwland argues that the new rules appear to have been prepared in haste, and not particularly focused towards speculators. He believes the new collection of IRD numbers should now provide the IRD with sufficient information to target property speculators without the need for the bright line test.
Before we look at issues of fairness, it’s worth questioning the efficiency and effectiveness of the tax. After all the new rules are only expected to generate $5m in tax a year!
But back to fairness. History demonstrates that any tax that is perceived to be unfair by taxpayers will be tested and resisted to the maximum possible. Past examples include very high personal tax rates, fringe benefits, etc. One still visible example is the window taxes imposed in Britain and France in the 18th and 19th centuries. The sight of buildings with brick-filled former windows is a bizarre reminder of tax policy folly.
Back home in New Zealand, the new rules are unlikely to impact the target of the legislation – property speculators. The most likely payers of the tax will be innocent investors who, through circumstances beyond their control, are forced to sell a property. Possible circumstances include illness, loss of employment, change in employment location and relationship breakups.
There will be instances where some individuals cannot own a property, for example, through limited mental capacity. In such cases a trust is the only logical way for property to be owned. In these circumstances, these properties would be taxed. This is absurd.
Another likely situation is parents gifting money to a trust for their children, to help them buy their first home. The new rules make the parents the principal settlor of the trust and liable for the tax, despite the fact that they are not living in the house and the house is actually the principal home of the child.
It would be a travesty if the proposed rules are not changed. Genuine property speculators will be smart enough to understand the rules and avoid their effects. The further consequence is that it will be even harder for the IRD to apply the intention test to sales of property owned for over two years.
It is very unlikely speculators will be speculating in holiday homes. The main properties for speculation will be everyday family homes, simply because that is where the strongest market demand is. Speculators are also unlikely to be to be speculating in sections, and if so, that intention should become clear after even the most superficial investigation. For instance, a couple looking to buy to build their first home will be clearly distinguishable from an individual who already has a settled family home, who has bought two sections, and obviously isn’t going to be living in both.
There will be grey areas, for example:
What exactly does the period of ownership mean?
Why should someone who has a home and income property be allowed a main home exception however someone with a separate rental property is taxed?
What is the position with the business exemption if someone is in the business of property rental?
The farm exemption only applies to an economic unit, so with the current dairy prices and farms making losses, will these properties be subject to the new tax regardless?
With the significant extra funding the IRD has received, and the increased information now available to the IRD, the IRD should have enough resources to enforce the current intention test, and therefore the proposed bright line test.
If the Government is determined to impose the rules, in all good conscience they need to make amendments. Gouwland suggests the key amendments should be along the lines of:
1. Decrease the sales period to one year to reduce the number of genuine sales that will be
caught by the rules.
2. Have the same acquisition and sale dates as the ordinary rules for the sale of land to reduce confusion.
3. Exempt any sale of land where the sale is used to fund a family home for a spouse pursuant to a relationship property split. This would avoid one spouse being significantly disadvantaged when having to dispose of a property in order to buy a family home.
4. Exempt any sale where a trust sells a property which was used by a beneficiary as a family home.
5. Exempt any sale where a parent sells a property used by any children or grandchildren as a family home.
6. Include in the family home exemption any land purchased as a section with the intention of building a dwelling.
7. Allow more than one family home, as a couple will just buy each property separately in the future to avoid the rules.
8. Allow all expenses to be claimed against a sale. If a property is being deemed taxable in circumstances where the seller is not speculating, they should be allowed these expenses, especially where there is little or no private use involved. A speculator would be able to claim all these expenses, so why not someone who is not speculating? This is likely to encourage non-speculators to claim that they are speculators, and that they made the purchase with the intention of resale, all so that expenses can be appropriately claimed. If allowing sellers to claim all expenses is not acceptable to the IRD, why not just disallow the costs for any days the property is used personally? This would have the added benefit of removing the argument over whether the improvements are definitely improvements and or just repairs.
9. Remove the specific company and trust anti avoidance provisions as these are unnecessary and will catch genuine transactions. The existing general anti-avoidance provisions adequately cover any mischief. Take for example a change in trustee due to death or a court order. There is no underlying change, so why should this cause taxable income?
10. Reverse the ring-fencing of losses provision, otherwise genuine sellers will be treated worse than speculators who don’t need to ring-fence any losses. Why should there be any ring-fencing at all? Anyone else with rental, business losses are not ring-fenced. If you are going to deem a sale taxable, then surely you must treat all sales the same.
11. Do not tax any gains made on the sale of land to associated persons. There is no logical reason why any gains are taxed, but any losses are not deductible. There is rollover relief for when companies amalgamate so why should there not be consistent treatment for other transactions between associated parties?
12. Include in the exemption any farmland used in a business, irrespective of whether it is an economic unit or not.
13. Only allow the family home exemption to the extent the property is used as a family home, so that any part of the property used for investment purposes is taxed like any other sole investment property would.
If all else fails, Gouwland suggests simply applying a lesser tax of around 10% so that people forced to sell for whatever genuine reason are not overly disadvantaged. “Let’s not allow a heated Auckland property market to create unfair tax situations”, concluded Gouwland.
For further information contact your local William Buck advisor on +64 9 366 5000 or firstname.lastname@example.org