From October 1 this year investors and foreign owners who buy and sell within two years will pay tax on their capital gains.
About one in six houses in Auckland fall into this category according to the government – which cited research by the Ministry of Business, Innovation and Employment (MBIE). The Prime Minister told Radio New Zealand’s Morning Report show that the IRD had evidence of foreign buyers deliberately rorting the system.
The Labour Party, however, says only 2 per cent of sales will be caught.
The government is giving the Inland Revenue Department (IRD) an extra $29m in funding to enforce the new rules, which are expected to net $420m in extra tax over the next five years.
Finance minister Bill English said in his Budget 2015 speech that the new tax measures were being introduced to take some of the pressure off Auckland’s housing market.
The new tax will apply to all non-residents and to New Zealanders who are buying and selling a property that’s not their main home.
Family homes exempted:
The new rules won’t apply to the family home, properties passed to estates on death, or homes sold as a result of property relationship splits.
Foreign buyers netted:
The government has argued consistently up until now that foreign buyers weren’t the problem in Auckland. As a result, the new tax rules caught many observers by surprise.
It is not clear how the government will enforce the rules when foreign owners sell. It has said, however, that all non-residents will now be required to provide an IRD number when they when they buy and sell property and to open a New Zealand bank account.
A capital gains tax in all but name:
Technically the new rules don’t amount to a “capital gains tax”, although that’s what almost everyone except the IRD and government are calling it.
There has always been a tax on profits made on properties bought with the intention of selling. “Intention” was and still is the key.
Anyone such as property traders who bought property with the intention of flicking it on for more with or without doing the property up were taxed on the profits at their marginal rate – if they were caught. That rule still applies whether or not speculators sell within the two year period or outside it.
The existing rules don’t just apply to investors – although the majority of the tax was earned from that group. There have been cases of owner occupiers who bought properties, did them up whilst living in them and sold to make a profit. They were usually only caught if they did it more than once.
The government says its main focus in Auckland is still on increasing housing supply through special housing areas and Resource Management Act reforms.