Prime Minister John Key says he first suggested the new property 'bright line' tax to Inland Revenue "four or five years ago", but they've only recently come around to the idea.
The new rules will require investors to pay income tax on any capital gain they make from the sale of a property they've owned for under two years. The exceptions are if it's their family home, or it was inherited.
Revenue Minister Todd McClay says despite only being a month in the works, it was carefully thought-through.
"Over a four- or five-week period we looked very closely at not only what the Reserve Bank is doing, but what other measures may be there from a tax point of view."
The law already requires people buying and selling property for the capital gain to pay tax on it, but it's difficult to enforce as it relies on the investor's stated intention. On TV3's Paul Henry programme this morning Mr Key said the new rules, which kick in October 1, will go some way towards removing the loophole.
"If you buy and sell it within two years – even if you're telling us you're intending to rent it – let's be honest, you're probably buying it with the intention of selling it, so you'll have to pay tax on that."
Mr Key says it's clear a lot of speculators are getting around the current law by not being truthful about their intentions when they purchase a property.
"In Budget 2010 we gave IRD $33 million for a bunch of people to go around and look at this situation – they have collected $250 million from cases [they found]… Our expectation is that we'll get $420 million, not even with the announcements made yesterday – just giving IRD more inspectors."
In that time, Mr Key says the IRD has come around to the idea of the two-year 'bright line'.
"IRD four or five years ago came back to me and said 'we don't like bright line tests for these reasons'. When we recently pushed them on it – and a series of other things we looked at – some of them they said no; this one, they said 'yeah, we've changed our view'."
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Shamubeel Eaqub, principal economist for the New Zealand Institute of Economic Research, calls it a "step in the right direction" – but it won't do anything to prevent a market crash, and attempts to stop one will ultimately be futile.
"Gently, gently is very difficult to manage. We haven't shown any ability to control the rise; what makes us think we'll be able to control the down? It's cute trying say that we're going to be able to engineer a soft landing."
He and Mr Key agree that supply is the key to cooling the market, but that will take years to implement.
"Over the last seven years, what we've seen is we're not building enough homes and it's still very slow," says Mr Eaqub.
"While we get that stuff fixed – which is going to take years, let's face it – we have to do something else to put a cap on what's happening in Auckland. I mean, $810,000 for the average house in Auckland? That's nuts."
He has more praise for the other aspect of yesterday's announcement – that the Government will require foreign buyers to use a New Zealand bank account and get an IRD number, and take withholding tax from sales that fall under the bright line rules.
"Actually going down the path of creating some clarity, some transparency around this, is really important – otherwise you go down the route of bigotry and racism, of 'you're a foreigner, you're putting up house prices'," says Mr Eaqub.
"I'd rather know how big they are, whether they're really the problem, and get them to pay taxes if that is the case."
"What happens at the moment is if a foreigner comes to New Zealand, a non-resident, and buys a property in New Zealand, sells it, makes a profit, even if they owe money we can't track them down – we don't have any information on them," says Mr Key. "This will force them to give us an IRD number and bank number, and actually withhold tax. They'll be withheld their tax, so they won't be able to run off somewhere."
Another benefit of this change will be to protect New Zealand's property market and tax system from money laundering. The Real Estate Institute of New Zealand this morning announced it will be taking voluntary steps to crack down on foreign buyers with large cash deposits, which it says is a sign illegal activity is taking place.
"Having the requirement of a New Zealand bank account and a linked ID account means they're going to come under scrutiny, which is a really good thing and protects our tax system and protects our sovereignty," says Mr Eaqub.
source: newshub archive