Property rule revision yet to show colours

Like Goldilocks, my assessment of the measure is definitely ‘‘not too hard’’, but there the analogy stops

It’s life, Jim, know it.’’ Many of you will recognise this line to Captain Kirk from the original Star Trek series. A similar description could be given to the Prime Minister’s announcement about property tax on Sunday.

Existing tax provisions will be extended as follows:

Gains from residential property sold within two years of purchase will be taxed, unless the property is the seller’s main home, inherited from a deceased estate or transferred as part of a relationship property settlement.

Non-residents and New Zealanders buying and selling property other than their main home must provide an IRD number.

Non-resident buyers and sellers must provide their tax identification number from their home country, along with current identification requirements such as a passport.

Non-residents must have a New Zealand bank account before they can get a New Zealand IRD number.

The new rules will take effect from October 1, after consultation.

Responses to the announcement have varied. Personally, I think the new rules will have minimal impact and are primarily a response to the political need to be seen to be doing something about the Auckland housing market. Like Goldilocks, my assessment of the measure is definitely ‘‘not too hard’’, but there the analogy stops.

It is important to acknowledge that the Prime Minister is correct when he states that there are already tax rules that tax gains when property is acquired with an intention or purpose of resale (section CB 6 of the Income Tax Act 2007).

There are exemptions for other than the family home or business

but not as we premises occupied by the owner.

The new rules are effectively an extension of that existing provision.

Therefore, I agree that there will not be a new tax.

The new rules, however, are significant as it will make it easier for a future Government to introduce more provisions that tax capital gains as income or possibly even a fully-fledged capital gains tax.

Section CB 6 often requires interpretation of a taxpayer’s actions in deciding whether property was acquired for speculative purposes. The new rules will remove that issue for residential property held for less than two years, but not the family home.

The questions I have are as follows.

Is two years from acquisition as defined in the act or from the time that title is received? Why two years: why not three, five or seven?

Will losses be able to be applied against other income? Why do the rules not apply to farm land and commercial property?

Several commentators have expressed the view that the new rules will have minimal effect unless the provision is extended to the family home.

Such a step would be political suicide and will not happen.

Only time will tell if the new rules are anything more than a ‘‘Clayton’s tax’’.

Murray McClennan is the director of Tax Central Limited, a specialist tax consulting firm. He can be contacted by emailing murray@taxcentral.co.nz.