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.
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.
Non-resident sellers will have to show it is not owed in order to get a refund at the end of the tax year.
Mr Key said the requirement for the additional information would give the Government "perfect information" about who is and is not buying property in New Zealand.
But if the new rules alter buying behaviour from here on, it will not necessarily settle the debate about how much overseas-based buyers have stoked property values to rise 60 per cent since 2008 and 18 per cent in the past year.
The IRD will get a $29 million boost for tax inspectors who will be digging back for tax owed in the past four years as well as for future liabilities. It reckons it will get $420 million.
"Meaningless" change as many fly under the radar - investor
An Auckland property investor who buys and sells homes regularly says the tax announcement is "absolutely meaningless", as he pays tax anyway.
Under present rules, homeowners must pay tax if they buy a property with the intention of selling it to make a profit, within 10 years of purchase.
The man, who did not want to be named, said the new tax would not change "a single thing" in the way the average property investor operates.
"Today John Key has been forced to eat his words."
"Those who have always just flown under the radar and taken no notice of [the tax] will continue to do that. People like me who acknowledge that you have a responsibility for the capital gain will report the capital gain and they will pay their tax on it."
Between 2011 and 2013 the man bought, rented and sold three residential properties in South Auckland, all to first-home buyers.
One was sold for about $298,000, another $355,000 and the final one, which included two separate houses on one piece of land, for $460,000.
He said that after agent and legal fees, and "do-up" expenses, he made about $100,000 profit altogether.
After paying 33c in the dollar in tax, he walked away with $67,000.
"And I thought I'd done well and was happy with that, still am happy with that, actually," he said.
But there were still a lot of property investors out there who would rather take their chances and not pay tax, he said.
"Of course people who hide these transactions will go on finding ways to hide them, or just forget to own up to them, and the announcement will, likewise, not change a thing for either themselves or the Government coffers."
He said the aspects of the announcement with "the most meaning" were the new rules about offshore investors requiring a local bank account and IRD number.
He was sceptical, however, as to how the Government was planning to enforce it.
Is this a new capital gains tax?
No. It changes the existing rules on taxing capital gains in relation to residential property.
At present, if someone buys a property with the "intention" of making capital gain, the profit is taxable. That rule remains but an additional rule says that the capital gain on any sale of a residential property (that includes sections) within two years of purchase will be subject to income tax.
Are there any exemptions?
Yes. The seller's main residence, inherited property and property that is sold as part of a relationship settlement.
Does that mean property speculators will just delay their sales to shortly after two years?
No. Because the existing intention law will remain and sales very shortly after two years will not mean an exemption from the existing rules.
Have rules changed for non-resident property buyers?
They are subject to and will be subject to the same rules on capital gain as New Zealand buyers but new rules about collection of data on them will make it easier to enforce, especially with a $29 million boost to IRD for tax inspectors.
What will non-resident buyers have to provide now?
A New Zealand IRD number on the land process documents, their tax ID from their home country, and they need a New Zealand bank account.
Who is a non-resident?
Someone who is not a New Zealand tax resident. And that may be a New Zealander living abroad.
What will the result be?
The moves are likely to deter short-term speculators from the Auckland market. The data requirements for non-residents will give the Government new information on who is buying and selling.
- additional reporting Scott Yeoman and NZME.