The long property tunnel has a bright line

For Web Edition-The long property tunnel-Darshana ElwelaDarshana Elwela

Budget 2015 marked a turning point for the government in its approach to runaway house price inflation in Auckland.

While the government has long dismissed that a ‘crisis’ is developing, its actions over recent times and Budget 2015 have certainly signalled that it is well aware of the need to act on both the supply and demand sides of the problem.

Auckland’s residential property sector is simply too big to fail.

The government has consistently held a line that growing supply in Auckland is the most important thing to be done.

Developing land

Leading up to and in Budget 2015, the government had announced it will contribute to supply by redeveloping land now held by the Tamaki Redevelopment Company and will also look to open up Crown-owned land in Auckland for housing development. Implementation of the social housing reforms also features heavily in Budget papers.

These initiatives mark a much more hands-on approach to growing supply than we have previously seen from the government.

Whereas earlier steps were regulatory in nature, the government is now intending to partner directly with developers to ensure that houses are built. In addition to previously announced measures such as Special Housing Areas, it will go some way to meeting the projected 10,000 a year new homes required to meet Auckland’s demand.

But at best, the Reserve Bank of New Zealand and others are only able to guess as to who is really driving the market. Is it owner-occupiers, new homeowners, rental investors (domestic or foreign), or speculators? This makes it difficult to respond with good, targeted policy (assuming that such a policy is possible).

The Intention

The two-year rule is, at least, a Bright Line. There will be no more ambiguity around proving of intent within this timeframe.

However, there is no revenue assumed to arise from this change in Budget 2015.

Investors who do not acquire for sale will only sell within two years if they are forced to, so limited tax will be paid.

Investors who acquire for sale are more likely to defer sales beyond the two-year period, in the mistaken belief that this guarantees the sale will be non-taxable. (It does not; a sale will be taxable whenever made if, for example, the property was bought for the purpose of sale).

The upside

In reality, the most important tax effect of the two-year rule is to provide Inland Revenue Department (IRD) with more readily usable information.

By providing investors’ IRD numbers, this will allow the agency to match investor information with its own records. This will make its compliance activity more efficient.

A mooted withholding tax will ensure foreign investors must front up and demonstrate the sale is not taxable to get their money back.

The flipside

On the downside, if IRD misinterprets that information, it may also make unnecessary disputes more prevalent. Investors will need to make sure that their documentation supports their position.

The new rules will give IRD de facto land register for investors.

It will have information on the relative holdings of domestic and foreign investors.

It must however be able to distinguish between foreign and domestic owned companies if it desires to produce a true picture.

Darshana Elwela is National Tax Director at KPMG New Zealand, Sponsor of the ‘Best Accountant of the Year’ Category of the Indian Newslink Indian Business Awards 2015.

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