The Government says it will change the law if needed after Inland Revenue revealed thousands of Kiwis could be slapped with a 39 percent capital gains tax following a new interpretation of the bright-line test extension.
In 2021, the Government extended the bright-line test from five years to 10. The tax means people who sell properties within 10 years have to pay tax on gains they make.
Family homes and investment new builds were explicitly exempt from the tax but a new IRD interpretation of the rules means anyone who spends 12 months or more away from their house - even if their family is still living there - would be taxed.
Speaking with AM on Wednesday, Dentons Kensington Swan partner and tax expert Bruce Bernacchi said the new interpretation is "outrageous".
He said one of the IRD's examples was a woman named Rachel who owned a house with her husband Luke. In the example, she moved overseas to work for two years while her husband and children stayed in the house.
She then moved home but, when they went to sell, was slapped with a tax bill for gains the property made while she was away.
"The IRD's own interpretation statement gives an example of a family where the wife is transferred overseas for two years. The rest of the family remains in the home.
"She comes back. They sell it and she is taxed on her share of the gain for the period that she was away even though it clearly remained the family home," Bernacchi explained.
He said the interpretation is shocking and could mean Cyclone Gabrielle victims who have been forced out of their homes are taxed.
"That's the other outrageous part about this interpretation. There's a group of people… all over the country but certainly some people in Swanson and west Auckland suffered massive flooding damage.
"My colleague had water up to one metre in her house. She hasn't been able to live in the house for the past seven months. Auckland Council and the central Government are arguing about who is going to pay for it. There is no hope of being in the house in a 12-month period and she saw this article yesterday and asked, 'Am I going to be slugged with paying tax on this gain that's been made while I couldn't live in the property?'... And I said, 'Unfortunately, yes.'"
But the Government said the bright-line test extension was never meant to include the family home and they will change the law to reflect that if needed.
A spokesperson for Prime Minister Chris Hipkins' office said it was never the Government's intention to tax the family home and "if needed we will change the law to make that clear".
"We are seeking clarification on the issue and if there is a loophole the rules will be changed."
Cyclone victims can be "assured that they will not be affected by the bright-line tax", the spokesperson added.