Property traders handed big bills

‘‘Inland Revenue ... are going back a long way.’’ Terry Baucher Tax expert

Inland Revenue scrutiny of property transactions has resulted in $12.5 million in tax bills for property traders and speculators last year.

The department is tasked with identifying property dealers and speculators who should pay tax on the gains they make from buying and selling properties.

A spokeswoman said its current focus was on identifying transactions that should be caught by the brightline test, which requires that tax is paid on gains from investment properties bought since October 2018 and sold within five years.

When it was first introduced in October 2015, it required tax to be paid on investment properties bought and sold within two years.

She said sometimes when a brightline transaction was identified it showed a pattern of dealing that led to a review of past transactions.

Before the brightline test was introduced, there was no set time period within which a sale was taxable.

It was determined according to the intent of the seller.

If Inland Revenue could show that they bought the property with the intent of sale, tax would be applied.

She said that in the year to December 2019, there had been 146 audits of brightline transactions resulting in $2.6m in additional tax being due.

There were 122 dealer and speculator audits, producing $9.9m in tax owing.

Tax expert Terry Baucher said he had noticed an increase in scrutiny on properties bought and sold before the brightline test was introduced.

‘‘Inland Revenue appears to be looking at property sales that have happened prior to the introduction of the brightline test and if the brightline test had applied they would have been taxable ... what has caught my eye is they are going back a long way.’’

Baucher said some transactions as long as seven years ago had been flagged. ‘‘The new approach seems to be: we can go back all that way because you did not file a tax return to cover what was taxable; the time bar rules of 41⁄2 years to look at things don’t apply.’’

He said he had expected more stringent action after the Government opted not to pursue a capital gains tax.

People who had not paid the tax they should could also be handed sizeable penalties, he said.

Interest could be charged on what was owed at a rate of more than 8 per cent a year. That meant a transaction from five or six years ago could end up with as much interest owing as there was tax due, Baucher said.

Andrew King, executive officer of the NZ Property Investors Federation, said Inland Revenue’s property compliance team had been successful in identifying speculators.

‘‘Very few people try to pass themselves off as investors rather than traders any more.

‘‘From our point of view it is a great initiative. We represent rental property providers and these people are giving us a bad name by trying to pass themselves off as us and not paying their fair share of tax,’’ King said.