House flippers in tax sights
Inland Revenue is proposing a change to the law that would stop ‘‘habitual’’ house flippers from avoiding tax on their profits by changing the person who makes the purchase each time.
The move follows the decision by the Government not to pursue a Capital Gains Tax (CGT) in April, which it thought would help flatten the frothy housing market. The Government has since pursued several other policies that crack down on speculation.
In general, Kiwis don’t have to pay tax when selling the land under their ‘‘main home’’ or business premises – as long as they didn’t intend to resell it when the property was bought.
There is a restriction on this to stop what IRD classes as ‘‘habitual’’ buyers and sellers – those with a pattern of buying and selling homes or business property, even if they live in the homes or use the business property. But this restriction only applies to individuals, and IRD believe many people are rorting the system by using their spouse or family trust to carry out separate transactions, or by varying the transactions to avoid the appearance of a ‘‘pattern’’. There were more than 36,000 property transfers in the last quarter. More than half were not required to state their tax residency or details – likely because the transfer involved the ‘‘main home’’.
The change suggested by IRD is an amendment to the law so the restriction covers groups of people or entities rather than individuals or individual businesses. If all the people lived in all of the houses concerned they would be netted by the change – even if different people or a trust was used to make the transaction.
Similarly, if all of the associated business entities occupied the same property they would all be caught in the tax net, even if each business made the transaction separately.
The agency is also looking to widen the definition of a ‘‘pattern’’ that attracts tax liability. Currently that must be a similar use – for example, a person who consistently buys homes, renovates, then sells.
‘‘Officials consider that the regular pattern restrictions should apply more broadly to any pattern of buying and selling,’’ the IRD wrote. ‘‘It should not matter whether properties were simply bought and sold, or whether any building or renovation work occurred while the person owned the land. What should be relevant is that there are ‘regular’ transactions.’’
A spokeswoman for Revenue Minister Stuart Nash said he was aware IRD was consulting on the proposal and if the advice was to go ahead, it would still require Cabinet approval.
‘‘However he has already signalled that the tax affairs of socalled habitual renovators, who seek to generate income from buying and selling houses they occupy, will come under increasing scrutiny,’’ she said.
The spokeswoman said Nash and the Government were always concerned at potential for existing tax rules to be abused. ‘‘In June the Government confirmed it would adopt a recommendation of the Tax Working Group to give IRD greater oversight of land transfers by requiring most sale and purchase documentation to include the buyers’ and sellers’ IRD numbers.’’
Revenue Minister Stuart Nash was ‘‘always concerned at potential for existing tax rules to be abused’’.