On October 19 the sixth Labour-led Government was formed in coalition with New Zealand First and the Green Party.
New ideas and policies are being introduced in the first 100 days of Government and Labour has announced plans to make significant changes to the housing industry in an effort to make homes more affordable for New Zealand citizens. Soon we will see the establishment of the Affordable Housing Authority, the commencement of the KiwiBuild project and the passing of the Healthy Homes Guarantee Bill in an effort to give New Zealanders a better chance at home ownership.
One of the key policies in the Labour Party campaign was restricting the impact of property speculators in the New Zealand market who, rightly or wrongly, are suspected of driving up the price of existing housing stock. This has put many Kiwis in an untenable position in the auction rooms. In response to this, Labour has proposed three changes:
1. To increase the scope of the residential property bright-line test from two to five years,
2. To ban foreign speculators from buying ‘existing’ homes in New Zealand, and
3. To stop taxpayers from offsetting tax losses created from negatively geared housing investments.
The New Zealand media has fed the public many policy sound bytes and catchy headlines but so far there is a lack of fundamental detail on how the proposed policies might apply.
The existing bright-line test seeks to tax any residential property sold within two years of acquisition, with an exemption for a taxpayer’s ‘main home’. During the election campaign, the extension of this bright-line test to five years was often touted as a silver bullet solution to speculators and the inflated housing market. However, outside this bright-line test, the Income Tax Act does already contain a provision to tax speculators who acquire property with an ‘intention or purpose of sale’. The problem has been that it is difficult, from Inland Revenue’s perspective, to prove what someone’s purpose is.
The bright-line test therefore provides a clear benchmark for both IRD investigators and taxpayers to determine whether any tax will be applied on a property’s sale. Extending the bright-line time period to five years reduces uncertainty. However, with such a long time frame it is likely to capture what are true property investments held on capital account.
The second policy change is focused on overseas property speculators. A modification to the Overseas Investment Act to class residential housing as ‘sensitive’, will mean ‘overseas investors’ will now have to request approval for the purchase of an existing New Zealand residential property. This will be similar to the existing rules in Australia, whereby overseas investors can only purchase ‘new’ residential properties, ensuring their money is directly invested in the construction industry, increasing overall housing stock numbers. The detail is yet to arise on how this will be implemented, however we can already see potential gaps where foreign buyers may be able to get around the constraint. It remains to be seen whether this will have a material effect on the demand for NZ property.
The final prong of Labour’s plan for speculative housing investment is to stop taxpayers from offsetting tax losses on their rental properties against their other income. This is known as negative gearing and is common. Speculators invest in properties knowing that their tax deductible expenses (including mortgage interest) on the property will outweigh the rental income, giving rise to a tax loss. The loss can then be offset against their other income, such as wages or interest, to reduce their tax liability, effectively subsidising the rental loss.
The current proposal suggests losses will be ring-fenced to each individual property. It is likely that quite detailed rules will be required to ensure the proposal works as intended. For example, investors could own each property in a separate company, and use the standard corporate loss offset rules to claim company losses from one property against profits from another. The new rules would need to cater for this type of planning.
Each change in isolation is not expected to stop speculative investment all together and stabilise house prices. But the proposed changes go hand in hand and may have a combined effect. We also have to be mindful of the wider consequences. The changes to the Overseas Investment Act could have a flow on effect on skilled labour coming into NZ. A recent addition to our team from the UK has already commented that if the changes were in effect when she arrived, their family would have likely gone to a different country, as NZ would have gone into the ‘too hard basket’.
As we continue to creep toward a capital gains tax, we could reach a tipping point where a broad based tax makes more sense than the mix and match approach that is currently evolving….cue the upcoming Tax Working Group.
The comments in this article of a general nature and should not be relied on for specific cases. Taxpayers should seek specific advice.