Threeyear KiwiBuild ownership requirement seems short
HOUSING affordability continues to capture the headlines and to be a focus of the Government. Since this Government took office we have seen several policy changes intended to reduce demand for housing from investors and speculators. We have had a ban on foreigners buying residential properties implemented and the residential brightline test that taxes residential property sales extended to five years. We await details of the proposed ringfencing of losses from residential property which will apply from April 1, 2019. The Government has now provided more details of its KiwiBuild programme intended to increase the supply of housing.
There has been much made in the media about how high the income caps have been set for KiwiBuild and other features. As a tax guy, the feature that got my interest was the threeyear ownership requirement. Cabinet papers reveal the reasoning behind this minimum ownership period was to mitigate the risk of a KiwiBuild home owner treating the scheme as a way to make quick taxfree capital gain. You can see the potential for this to happen. If I can secure a brand new threebedroom home in Auckland or Queenstown for $650,000 in a market where the average house price is north of $1,000,000, there is a big incentive to cash in on a $400,000 to $500,000 taxfree windfall courtesy of the Government. The Government has settled on three years as a sufficient period to guard against this, although it will allow exceptions for unforeseen circumstances, such as death of a partner, divorce, or serious illness. The penalty for breaching this ownership requirement is far from apparent.
The threeyear ownership period considered sufficient to dissuade speculators taking advantage of the KiwiBuild programme seems to stand in stark contrast to the fiveyear ownership period required by the brightline test for residential land. For the purposes of the brightline test, ownership of residential land for less than five years is deemed an indication of a speculative intent. Why then only three years for a KiwiBuild home when the purchaser is entering into the purchase in full knowledge there is a significant gain built into the transaction for them? Further, the brightline test has no regard to unforeseen circumstances that may require a property to be sold within the fiveyear period. We have encountered circumstances in which a person has intended a property to be their main home, but before it meets that definition are forced to sell due to ill health and resulting financial difficulties, resulting in a tax impost. It seems inconsistent to recognise unforeseen circumstances as justifying a sale of a KiwiBuild house, but not for brightline test purposes. It also seems inconsistent to suggest three years’ ownership is sufficient to prevent speculators taking advantage of a scheme with significant builtin gains, but five years is required when there is no such certainty of gain or its quantum.
A Scott Mason is the managing partner of tax advisory for Crowe Horwath Australasia.