NZ launches property tax crackdown
The New Zealand Government has launched a crackdown on residential investment property traders in an attempt to help the Reserve Bank of New Zealand control runaway house price inflation in Auckland.
Prime Minister John Key told a post-cabinet news conference on Monday the government had been in discussions with the RBNZ over the last six weeks about how to control demand in Auckland, where median house price inflation hit 19 per cent on an annualised basis in April.
The government announced on Sunday a range of measures aimed at more strictly applying rules forcing property traders to declare capital gains for income tax purposes.
New Zealand does not have a capital gains tax, but rental property investors who plan to quickly trade property for capital gains are supposed to declare their intentions as traders to the Inland Revenue Department. Investors are, however, able to say to the IRD that they never intended to trade their properties and have therefore been exempt from declaring capital gains as income.
Key announced a so-called "bright line" test on Sunday that means the IRD assumes that any property sold within two years of purchase was sold for capital gains, with the exception of homes occupied by the owner, homes inherited from a deceased estate or homes transferred as part of a relationship settlement.
Any capital gains made within two years are therefore automatically eligible for income tax at the marginal income tax rate of the investor.
Key also announced a crackdown on reporting of property transactions by non-resident investors, who are able to buy both existing and new homes in New Zealand without any taxation or declaration of residency status. From October 1, non-resident buyers of property will have provide passport details, home country tax details, open a New Zealand bank account and obtain an IRD number.
Non-resident investors are also covered by the bright line test and the Government is considering introducing a withholding tax for this income from mid 2016.
The announcements surprised observers, given that just five weeks ago Key rejected any suggestion of new tax measures for rental property investors. But the RBNZ called on April 15 for the Government to reduce the tax incentives around capital gains for rental property investors. Last week it also introduced new restrictions on high loan-to-valuation ratio lending to Auckland property investors, banning mortgages with LVRs above 70 per cent for such investors.
The Reserve Bank reported on Monday that rental property investors borrowed NZ$16.3 billion through mortgages with LVRs of 70 per cent to 80 per cent in the eight months to March, which was 42.5 per cent of all new mortgage lending.
Asked what had changed for the Government in the last month, Key said: "I think you have seen sustained price increases that have been a bit quicker than we would like in recent times, and the second point was that we started having discussions with the Reserve Bank, particularly around the speech that they gave, about what would be some alternatives."
"They came up with the LVRs for investors. We thought this might complement that," he said.
The Government's changes are designed to apply from October 1, which is when the new LVR rules for Auckland property investors also apply.
Key said the combined changes would have an impact on Auckland's property market, but the Government had not done any modeling, and was also not budgeting for any extra revenue from the 'bright line' test.
"I don't think the announcements we made yesterday are so significant that they are going to deflate the Auckland housing market," he said.
"I think they are just another thing that might help slow it down a bit, but I wouldn't want overstate them."
ANZ Chief Economist Cameron Bagrie said the joint RBNZ and Government measures could mark a turning point for the Auckland market.
"We believe sentiment could turn on a dime," Bagrie said.
"We will be paying particularly close attention to the number of property listings over the coming months, which could rise sharply as sellers try to beat the 1 October introduction of the new measures," he said.
"Some sellers may rush to get out while the going is good."