Five-year tax rule coming

01 March 2018

Investors holding onto residential properties for less than five years will be paying tax on any profits under an extension to the previous government’s bright-line test that’s expected to pass into law this month.

Coalition Revenue Minister Stuart Nash announced the extension, from two to five years, last month. He said the changes, which were signalled by the Labour Party prior to last year’s election, would help dampen property speculation and make homes more affordable.

"It will ensure that property speculators pay income tax on their gains and makes property speculation less attractive.”

The rule means that profits from residential investment properties, which are bought and sold within five years will generally be taxable although current exemptions from the bright-line test will remain.  These include the sale of an owner-occupier’s main home, inherited property, or the transfer of property in a relationship settlement.

The new rule will apply to residential investment properties purchased from the date on which the bill receives the Royal Assent, which is expected in March. Mr Nash said that the passage of the bill would enable the Tax Working Group, set up by the government, to factor the change into any consideration of a comprehensive capital gains tax.

Meanwhile, an editorial in Christchurch newspaper The Press described the five-year test as “a populist move that sits well with Labour's larger arguments against foreign ownership of New Zealand property, immigration changes and the KiwiBuild​ programme”.

It noted that officials from Inland Revenue and Treasury had cautioned that the test could reduce the number of houses for sale, pushing up house prices. 

“Another perverse side effect is that rents could rise if the bright-line extension pushes investors out of the market. The officials speculate that a reduction in the supply of rental housing could outweigh the reduction in demand for rentals.” 

Recent cooling of the Auckland property market meant there was no longer the sense of urgency or panic about house prices and unaffordability that dogged the last Government. “In a larger political sense, the extension signals another welcome shift away from short-term thinking and the unproductive effects of housing speculation,” said The Press.

Mr Nash said that while the five-year test may not generate much more revenue, it should further dampen speculation and that is the primary effect the Government is aiming for. He also sees it as a way to put fairness back into the tax system. "We need investment which grows the economy and creates jobs, not the sort of investment which distorts the residential housing market".

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