The bright-line rule introduced by the Inland Revenue Department (IRD) last year to curb house speculation is exposing some genuine home buyers to a significant tax liability, say experts familiar with the issue.
And despite being warned by tax experts during submissions before the new rule was introduced of the potential risk to genuine home buyers, the IRD declined to amend them and says it has no plans to do so.
Under the rule, introduced in October 2015, anyone who buys and disposes of a property within two years of acquiring it has to pay tax on the gain at the marginal tax rates - typically around 30 per cent. There are some exceptions like the main home exemption, inheritance and relationship split-ups.
History has shown many times that there are often unintended consequences with taxes ... sadly the rules are already biting genuine home buyers ...
However, says Sybrand van Schalkwyk, senior tax manager for Staples Rodway Tauranga, the rule could also impact genuine home buyers who acquire an interest in a property in their own name and later nominate their family trust to settle the deal. This is particularly an issue where house and land packages are bought off the plan, but may not be settled for 12 months or more.
"History has shown many times that there are often unintended consequences with taxes," he said. "And sadly the rules are already biting genuine home buyers who nominate their family trust to settle the deal."
Most people are aware that the bright-line rule will not tax a house that is used as the purchaser's main home for the majority of the time they owned it, said Mr van Schalkwyk.
"However, a closer reading of the law reveals that this is not the case where a family trust is nominated to settle the deal some time after the purchase contract has been signed," he said.
"A little known provision in the legislation provides that, when that nomination takes place, the buyers are deemed to have sold their interest in the land at market value. Accordingly, when they nominated their family trust to complete the transaction, their interest was deemed to be disposed of within two years, so if there is a gain it is taxable."
Holland Becket Lawyers partner John Mackay said bright-line did not just affect purchasers buying off the plans, but that was probably the key example because of the lead time.
"You have clients who are entering agreements to buy house and land packages where titles haven't been issued and they could potentially be waiting 18 months before they settle," he said.
"That's a real trap because there is almost certainly going to be a lift in value if they decide to transfer it into a family trust, and whatever the lift is there will be tax payable on it."
An IRD spokesperson told the Bay of Plenty Times there was no policy work under way to review the issue.
"The bright-line rule doesn't apply to the sale of a house which is used as the main home for the majority of the time owned," the spokesperson said.
"However, in the case of a purchase off the plans, the house has never been used as the main home and therefore cannot qualify for the main home exemption. The test is intended to cover sales 'off the plan' where the right to buy land is disposed of before settlement. This is because much of the turnover of residential property is through these sales off the plan."
Mr Mackay said the legal and accounting professions had become aware of the issue and had clients who were potentially affected, adding that none would wish any publicity about their individual cases in order to avoid drawing the attention of the IRD. One option was to simply retain the property in the buyers' names and not transfer it to a trust until the two years was up, he said.
"The way we are dealing with it is, if we have a client entering into an agreement and it's anticipated they might nominate another entity such as a trust to settle, we look to make the nomination shortly after the initial agreement is entered into, when the value shouldn't have changed much."
The IRD's enforcement policy
• In Budget 2015, an additional $6.5 million in funding per annum over five years was provided, doubling the resource for the IRD's compliance programme, which includes monitoring disposals of interests in land that have been held for a short period.