New rules announced in the budget will impact the sale of rental property within two years of purchase regardless of the landlord’s circumstances or intention.
Any disposal of residential property within two years of purchase will be taxable with effect for acquisitions after 1 October, 2015.
An important caveat is that the family home is exempted from these changes.
In addition, buyers and sellers will need to disclose their IRD number. Non-residents will need to have a New Zealand bank account in order to get an IRD number. The government has justified the changes by stating that they will ensure that both resident and non-resident investors pay their fair share of tax.
How is the situation different from before?
Land and buildings purchased with the purpose or intention of sale are taxable. This will continue to be the case.
Many landlords purchase property with the sole intention of rental. Case law has established that landlords in this circumstance are not taxable, even if there is another purpose to sell the land. As such, the test has centred on what the dominant purpose was when the property was purchased – the so called ‘dominant purpose’ test.
The new legislation will take away the dominant purpose test for the first two years of holding property. If the property is disposed of within this timeframe, it will be taxable regardless of the intention.
Once the two year period has elapsed, the existing case law continues to apply.
More funding for compliance
The government has also announced that they will provide IRD with initial funding of some $29 million to police the new legislation, with a total of $62 million over the next five years.
Withholding Tax Proposed
It is likely that the legislation will include a new withholding tax on any disposal of property by non-residents. Any refund of this withholding tax would then need to be applied for by filing a return with the IRD.
Who is all this aimed at?
Anyone who owns residential rental property should take particular note. As the ‘dominant purpose’ test will no longer apply for the first two years, previously non-taxable gains will now become taxable.
For foreign property owners, there is a real possibility that information on their New Zealand based activities will be shared with the tax authorities in their home countries.
What is the likely impact?
Investors will almost certainly look to retain ownership of properties for at least two years. Perversely this may have an impact on the government’s stated desire to increase the housing stock, at least in the short term. It seems certain that properties purchased after 1 October 2015 will take at least two years to be placed back on the market, unless there is a distressed sale.
There are often legitimate reasons why investors may be forced to dispose of their property within a two year time frame. For instance, an investor may lose their job and with it the ability to service a mortgage. They would be impacted automatically if they had to sell the investment property within the first two years of ownership.
Consultation is now open on the changes with a select committee to consider the legislation in next few weeks.
In closing, remember that the the proposed law will only impact the first two years of ownership. The ‘dominant purpose’ test or intention will continue to apply for sales after that time has elapsed.