In a surprise move before Finance Minister Bill English presented his Budget 2015 to Parliament on May 21, the government announced that it will tax residential property investment that is sold within two years if the following conditions are met:
The property is not family home, inherited property or property transferred in a relationship settlement. Investment properties and holiday homes will be caught if acquired on or after October 1, 2015.
Also from that date, buyers and sellers must provide their IRD number and non-residents must have a New Zealand bank account to get an IRD number (as well as provide a Foreign Tax Number). A withholding tax on non-resident sellers is also being considered, with a possible mid- 2016 introduction.
The measures are aimed, at least partly, to cool hot spots in the housing market.
What does this mean?
There are already rules for taxing property. However, these require the property to be bought with the dominant purpose or intention of sale.
Where the property is rented (e.g. while held for sale), this intention can be difficult for IRD to prove.
From October 1, 2015, investment property bought and sold within two years will be taxed, with no exceptions. This includes where someone is not a property speculator, i.e. did not buy to sell but is forced to do so.
Further, investors should be aware that holding for more than two years is no guarantee that any gain will not be taxable.
Existing tax rules will still apply in this case.
The need to provide an IRD (and Foreign Tax) number and have a New Zealand bank account are aimed at ensuring sales can be tracked by IRD and foreign buyers comply with New Zealand’s Anti-Money Laundering requirements.
This tax information is also likely to be shared by IRD with the non-resident’s home country. This will make non-compliance more difficult, and is a positive move.
The question for many is whether this will cool growth in the housing market.
If investors respond by holding on to properties longer, to avoid the two-year rule, this will constrain the stock available for sale in the short term.
There may also be increased demand leading up to October 1 to avoid the changes.
The long-term picture is likely to depend on broader housing demand and supply factors, rather than the tax rules.
Dinesh Naik is Tax Partner at KPMG New Zealand, Sponsor of the ‘Best Accountant of the Year’ Category of the Indian Newslink Indian Business Awards 2015.