A capital gains tax on residential property sold within two years of buying it is being seen as a step in the right direction, but not far enough, with few expecting the new tax to have a big effect on Auckland property prices.

Prime Minister John Key announced the plan this morning as part of the Budget package.

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The exemptions to this new bright-line test will be if the property sold is the seller's main home, if it is part of a deceased estate or inherited, and or if it is transferred as part of a relationship settlement.

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The tax will be on the seller's normal income tax rate.

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Labour leader Andrew Little said this afternoon the moves were "weak measures to rein in the astronomical profits property speculators."

But he said they were an admission that there was a housing crisis.

"For years the Prime Minister has denied there is a crisis, refused to admit foreign investors are pushing up house prices and said there is no need to dampen down housing demand. Today John Key has been forced to eat his words."

"This is not only an admission there is a housing crisis, it is an admission that the intention test in the current law is not working."

But he said National was only tinkering with the housing market with moves that were tentative and incremental.

"The Prime Minister is creating a massive loop hole with his new 'bright line' test which will exempt speculators who hold onto their properties for longer than two years," Mr Little said.

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However Mr Key told reporters today that because the current rules about "intention" still applied, someone who clearly intended to make a capital gain would still be taxed whether the property was sold after two years and one day, or even after 10 years.

Mr Little said it was unclear whether the measures will have much effect on Auckland's "run-away housing market."

"I call on the Government to release its figures showing how many speculators will be caught and how many will escape untouched"

"What is needed is a more comprehensive and wholehearted crack down on speculators, alongside Labour's policy of banning residential property sales to foreign speculators."

Mr Little said the policy was not a Capital Gains Tax, but a tightening up "intention rule" that Inland Revenue already had in place.

"So if you buy a property intending to sell it to make a profit on it then you get taxed on it."

Mr Little said there should be a full review of the tax system before looking at implementing a Capital Gains Tax and was not something Labour would have as a policy going into the next general election.

"A Capital Gains Tax...doesn't stop the property price bubble because it never has anywhere else where it operates.

The issue right now is buyers, particularly in Auckland, being shut out of the property market, because of extremely high prices, speculators buying the properties and foreign buyers not needing to borrow buying into the market, Mr Little said.

"so you've got to address those measures."

The Government had taken the "smallest possible steps" to address the issue and they did it begrudgingly, he said.

Labour's view was that the State needed to lead a "massive" affordable house building programme.

Investors might decide to hold onto their properties for two years before selling, which could increase the supply problem, he said.

"You get into a land-banking problem."

The move, announced today and due to take effect in October, is a bid to combat Auckland house inflation which has seen property values increase by 60 per cent since 2008. File photo / Brendon O'Hagan
The move, announced today and due to take effect in October, is a bid to combat Auckland house inflation which has seen property values increase by 60 per cent since 2008. File photo / Brendon O'Hagan
The capital gains of people selling residential property within two years of buying it will now be taxed, Prime Minister John Key announced this morning as part of the Budget package. Photo / NZ Herald
The capital gains of people selling residential property within two years of buying it will now be taxed, Prime Minister John Key announced this morning as part of the Budget package. Photo / NZ Herald

Plan to slow down housing price rises

The move, to take effect from October 1, is expected to address Auckland house inflation which has seen property values increase by 18 per cent in a year and 60 per cent since 2008.

At present, capital gains are taxed if IRD believes it was the intention of the seller to make a capital gain on a property.

That rule will remain in addition to the bright-line test so that if somebody flicked on a property after two years and one day, they would almost certainly have to pay tax on the gain.

The Government will also introduce rules that could make the over-heated Auckland housing market less attractive to non-resident speculators.

The Government had not forecast collecting anything extra in capital gains tax through the bright line test but it will make the rules clearer.

New disclosure rules will give the Government information about who is buying property - residents or non-residents.

All buyers and sellers of any property other than their main home will be required to supply a New Zealand IRD number as part of the usual land process with Land Information New Zealand.

And all non-residents will have to haver a New Zealand bank account before they can get a New Zealand IRD number.

That information will help IRD to work out who is trading property for the purpose of making capital gain.

Under existing laws, IRD will be able to share that information with overseas tax authorities.

Mr Key also announced that IRD would get an extra $29 million in the Budget for tax compliance which in addition to the $33 million extra since 2010 in compliance and enforcement would total $62 million extra for compliance over the next five years.

That extra is expected to generate $420 million in additional tax in the next five years.

Mr Key said the Government would also investigate introducing a withholding tax for non-residents selling residential property.

Mr Key made the announcement at the National Party's lower North Island conference at Silverstream.