The Government will give extra $29 million over the next five years to Inland Revenue Department (IRD) in Budget 2015 for the property tax compliance activities.
This is mainly to ensure property speculators also pay their fair share of tax, which is currently being largely avoided.
The additional allocation will take the total funding on this account to $62 million.
The forecast is that it will generate additional revenue of at least $420 million for the government.
The new rules will come in to effect from October 1, 2015.
All New Zealanders and non-residents must supply their IRD number at the time of property transactions (buying and selling) other than their main home (principal place of residence).
New rules will comply with Anti-Money Laundering regulations and all buyers and sellers must provide their IRD number for each transaction. Non-Residents must have a New Zealand bank account that is operational to obtain an IRD Number.
The so-called Bright Line Test will come in to effect, which is in addition to current Intention Test of the IRD.
Under the Bright Line Test, if the property is sold within two years, then any gains made out of the transaction must be included in the tax return.
Bright line Test
This test will require income tax to be paid if a residential property is bought and sold within two years, unless it is the seller’s main home.
If a property is sold within two years, then the tax will be paid on any gains made from the sale. There are some exemptions such as seller’s personal home, inherited property and relationship property settlement.
IRD will have sufficient information around these issues prior to the commencement of the new regulations on October 1, 2015.
However, this may be little harder to implement in practical terms, as people may wait for two years and then sell their property.
Intention Test has always been a subjective matter but the Bright Line Test gives more tools to IRD to implement property related tax.
Only time will tell if the new rules will help regulate the property market in the absence of full-fledged Capital Gain Tax.
Saurav Wadhwa is a Charted Accountant and Principal of IBBZ Accounting Limited based in East Auckland. Phone 027-5555458; Email: Saurav@ibbz.co.nz