The new rules follow growing concern that first-home buyers are locked out of the Auckland housing market. Photo / Michael Craig
The new rules follow growing concern that first-home buyers are locked out of the Auckland housing market. Photo / Michael Craig
Two-year ownership requirement and curbs on foreign buyers announced as Govt moves to cool the Auckland market.
New measures to tax capital gains on residential property will help weed out speculators and foreign investors who trade Kiwi homes just to turn a quick buck.
But some commentators are questioning what effect the new tax rules will have on Auckland's heated property market or how many traders will be "caught in the net".
Prime Minister John Key announced a raft of new measures yesterday aimed to help curb spiralling house prices and track the number of foreign buyers purchasing Kiwi homes.
From October, anyone selling a residential property that is not their main home within two years of purchasing will face tax on the capital gain.
This morning John Key told Newstalk ZB he wasn't a fan of a capital gains tax and the new tax rules were not such a tax.
"What we do in New Zealand is have an intentions-based test so if you buy an investment property, then the question is did you intend to rent it or did you intend to buy it and sell it?
"If you intended to buy it and you sell it then you were taxed at the marginal rate.
"What we are now saying is forget about if you buy it and sell it within two years what your intentions were. Your clear intentions were to buy it to make a profit so you have to pay tax on it."
Mr Key said the new laws would make it easier for IRD to catch residents and foreigners trying to cheat the system.
"The second big part of the package is based on foreigners. It is just saying look, at the moment you come and we don't have information on you. You may not have a bank account, IRD number and even if we know you have bought and sold property quickly to make a quick buck, tracking these people down is nigh impossible.
"So all the changes we are making will close that loophole down."
Mr Key said he didn't think it would have a huge impact on the Auckland housing market; rather it was just one step of many that needed to be taken to cool down the market.
"I don't think we should get carried away on that. I still think the right answer is building more houses. The reality is that you need to do a whole lot of things, this is just one of them," he said.
"This is just a tidy up of the tax laws."
The tax will apply to both domestic and foreign sellers, irrespective of whether they intended to buy the property to make profit.
It means no one will be able to argue with IRD about their "intentions" in the first two years of buying and selling a property - unless they fall into the three exemptions: family home, or sales for matrimonial settlements or inherited property.
The Government will also track the number of foreign buyers by making all buyers and sellers of investment properties supply a New Zealand IRD number and forcing all non-residents to have a New Zealand bank account.
The moves follow growing concern at the plight of first-home buyers locked out of the Auckland housing market and house price inflation that has seen property values across the city surge by 18 per cent in a year.
New Zealand Institute of Economic Research principal economist Shamubeel Eaqub said the announcement was a step in the right direction. Investors were a significant player in the housing market, he said.
"We know somewhere between 40 and 50 per cent of houses being bought are by investors who own many properties."
The new policy would help resolve some of the problems "throwing fuel on the fire" of Auckland's housing market, while buying time to fix the city's critical housing supply issues. Importantly, it clarified who was a speculator or investor, creating a clear and transparent system for regulators and IRD.
He also welcomed moves to track the number of non-resident foreign buyers purchasing New Zealand homes. "How can you know if there is a problem and whether you should do something about it if you don't know what the issue is?"
Property Institute chief executive Ashley Church labelled the new rules "welcome tweaks" rather than major policy changes.
The Government already taxed anyone buying an investment property with the intention of selling it at a profit, within 10 years of purchase.
The real change was giving IRD more teeth to police the existing policy within the first two years of purchase, he said.
John Key announced the new measures yesterday. Photo / Chris Gorman
Mr Church said the measures might generate a little more tax income but would do little to reduce house price inflation.
"I wouldn't imagine that there are too many speculators buying and selling quickly in this market because capital growth is so strong. It's more likely that most investors will hang on to their properties for a few years - at least until this current boom has run its course."
University of Auckland Business School tax expert Mark Keating said the new tax rule was "so narrow as to be almost inconsequential".
The two-year threshold was too short and could easily be manipulated by savvy investors, he said. The changes also failed to account for mum and dad property owners renovating their family homes then "flipping" them for a profit.
However, Real Estate Institute chief executive Colleen Milne said the two-year timeframe clearly targeted profit-motivated traders or overseas investors.
"One would hope that it may remove the speculators ... and that the implications of having to pay tax will slow that down."
Ms Milne welcomed the targeted measures as opposed to a blanket capital gains tax that would have pushed up Auckland prices and not solved the root cause of supply.
Labour leader Andrew Little, whose party wants to ban all house sales to non-residents, said for years Mr Key had denied that foreign buyers had pushed up prices.
"Today John Key has been forced to eat his words."
Labour is set to ditch the capital gains tax it has fought two elections on but Mr Little said speculators would find loopholes to get around the two-year 'brightline' rule.
National's moves follow Reserve Bank measures last week to require investors in Auckland to have a 30 per cent deposit on new bank loans.
Grant Duncan, political commentator from Massey University, told NewstalkZB this morning the policy shift could be seen as National taking Labour's good policy ideas.
"One of the comical things about this announcement is that it shows that John Key's Government knows darned well that Labour has good policies, and so it's actually quite a good idea to snatch one or two of them," he said.
"And do it early in the election cycle, do it in your first Budget after the election so that come the next election everyone's forgotten about the embarrassing flip flop."
Mr Duncan said it could be seen in two ways - a tightening up of the existing capital gains tax, or "a rather embarrassing flip flop" for a Government that until recently was adamant that there was no need for such a tax.
However, speaking on TV3's Paul Henry show this morning, Prime Minister John Key said the announcement was not a capital gains tax, but a squeezing of the existing law, which would help clarify what the rules were and make it easier for IRD to keep track of.
He denied the change was linked to claims the overheated Auckland housing market is in a bubble, which is close to bursting.
"The purpose was, in the Budget we are having some housing initiatives ... this is just part of the tightening up of the tax loop, if you like," he said.
He added: "We started really working on it six weeks ago, but we've looked at these things over the course of the last five years."
Such changes "actually help make the system a bit fairer", he said.
On Radio New Zealand's Morning Report, Mr Key denied the new policy was a capital gains tax, claiming it was simply a "confirmation of the existing law in New Zealand".
Foreign buyers targeted
New house-buying rules for foreigners are designed to deter them from making a fast buck in the overheated Auckland market or, if they do, to at least make them pay tax on that fast profit.
Too many non-resident buyers had been able to skirt around the current tax rules, Prime Minister John Key said yesterday as he made the major Budget announcement.
"It's far easier for them to disappear and for us not to be able to track them down," he said.
"It's fair to assume that quite a few of them are not paying their tax bill."
They will have to open a New Zealand bank account to get a New Zealand IRD number which will be recorded on the legal records of the sale.
They will also have to supply their tax number in their country of origin so the IRD in New Zealand can work with other tax jurisdictions.
And what may really turn them off the Auckland market is that Mr Key gave notice that next year a withholding tax will be introduced for non-residents' residential property sales, meaning tax on the profit will be collected at the point of sale on the assumption it is owed.