John Key Quasi Capital Gains Tax set to stop the cowboys

Ahead of today’s Budget announcements, one of the most interesting things we’re likely to see will be the fine-tuning of John Key’s quasi-capital gains tax announced last weekend.

This tightening of rules on property transactions, which comes into effect on 1 October, will see a capital gains tax (CGT) imposed on residential property sold within two years of buying it.

It follows ongoing prodding by the Reserve Bank of New Zealand for action to curb the “skyrocketing house prices in Auckland” – which the Bank partly addressed with its recent hike on Loan to Value Ratio restrictions for property purchases in Auckland from 20% to 30%.

Now, today’s Budget will deliver measures for a ‘quasi’ CGT, effectively tightening the existing law that taxes any profit on property transactions where there is ‘intent’ to create profit or gain when purchasing.

‘Intent’ will still be an important measure for property transactions but now all property sales within two years of purchase will require a ‘please explain’ to Inland Revenue.  And Inland Revenue will receive an extra $29 million to increase its property tax compliance activities.

It will potentially stop the quick do-up-and-flick. Buyers will have to have the intention to hold onto property for longer if they don’t want to pay tax and take the risk and added cost associated with that.

Tax on property has always been a grey area in our legislation, this will hopefully bring us up to speed with Australia which has had some definite rules on when you will and won’t fall subject to tax on property sales for a long time.

There are exceptions for the family home and inherited assets. I don’t believe this will stop speculation as people will simply build a tax cost into their sums when doing the math.  Previously, if you made $100,000, you got to keep the lot, now you will only get $67,000 after paying the tax man – you have still gained from the transaction.

However, it may take the cowboys out of the market i.e. those that manage to do a few transactions and ‘slide under the radar’ and wish to avoid the tax man at all costs.  And, this all only works if there are two major drivers – one, we have more honest people in the country than currently exist and two, Inland Revenue have more ‘teeth’ in the form of resource to trawl through all property transactions to ascertain transactions of interest.

It is important to note that this is not a test just for Auckland; it will apply to all property transactions.

And with the other new requirement for foreign buyers to have a New Zealand bank account and an IRD number – well, it is about time.

 

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