There has been a lot of talk about property speculation and capital gains tax since the Government announced their extra property tax measures with the 2015 budget. Their plan was to attempt to dampen the Auckland property market as well as ensure that all property investors pay their fair share of tax. If you have been living under a rock for the last year, Auckland property is selling like hotcakes for amounts well in excess of current QV!
Many of the queries we have received since the announcement, had people asking "how does this affect us" so here is the low down.
The announcement included three components of tax reform which affect all buyers and sellers of land (with some exceptions of course).
The first legislates the gathering of better information from all people dealing in property with a focus on the enforcement of tax obligations of offshore persons. Effective for contracts signed after 1 October 2015, all purchasers and sellers of property will be required to provide a NZ IRD number. If the buyer or seller is an offshore person they will be required to hold an active NZ bank account before they apply for an IRD number. The exception to this rule is if you or I are buying or selling the "main home", unless the home is owned by a family Trust. Many family Trusts only own the "main home" of the settlors and have not been required to have an IRD number until now.
The second component is a bright-line bill which was introduced to parliament on 24 August 2015 and passed its first reading on 08 September 2015 ("bright-line" means a clearly defined rule which is designed to produce predictable and consistent results). This bill will be effective from 1 October 2015 once given royal assent. It will mean income tax will need to be paid on capital gains made on the sale of residential land and buildings bought and sold within two years. Current tax law captures capital gains where there was intention at the time of purchase to make a profit. The grey area here, is proving that there was intent at the time of purchase. This bright-line test will capture capital gains on property speculation and tighten up the 'intent' test. There are some exceptions to this rule being: the sale of your "main home", the transfer of inherited property and property transferred under a relationship property agreement.
The finance and expenditure committee have provided commentary on the bright-line bill after considering public submissions and have proposed the bill be passed with a few amendments. One of these is that the main home exemption will only apply to the first two sales in the two year period. Income from the third sale would be taxable. A further proposed amendment relates to family trusts, if the Trust meets certain criteria then the main home exclusion can apply.
The third component is a proposed bill which will see with holding tax imposed on sellers of NZ residential property who live overseas and are subject to tax under the "bright-line" test.
Overall the three components of reform are a great step towards a fairer tax system. Time will soon tell if the reform will have the intended affect on the Auckland Property market.
If you are thinking of buying or selling a property and are unsure of your tax obligations then please give us a call today to discuss.