Tax can change the outcome of a financial benefit greatly. As the number of property transactions increase, be aware of the changing tax consequences of some property transactions from this month forward.
Generally there is no capital gains tax on property sales in New Zealand. However, new rules affect properties purchased from 1st October 2015 and sold within two years of being bought may attract a tax liability from any increase in value.
The “bright line test” will be used to help Inland Revenue distinguish those who buy and sell residential property with the intention of making a profit from property sales.
The IRD has always had the ability to impose a tax when a property was bought with the INTENTION of profiting from the sale. But “intention” is often difficult to determine and enforce, resulting in a loss of tax revenue.
Under the new rules the sale of your main home is exempt, as is a property transferred on the death of a person or under a relationship agreement.
The calculation of the taxable portion is simple: it’s the difference between the purchase price and the selling price. And the tax is calculated at the individual’s marginal tax rate, the same as any other income.
Habitual renovators will also have the “bright line” test applied to them. Anyone who frequently buys a home and does it up while living in it, then sells it for a profit is really running a trading business.
These people should be taxed under existing law, so the new test simply makes this clear. It states that if a home renovator buys and sells their home more than twice in a two year period, they will be deemed a trader and tax will apply on any profit they make.
The bright line test is not aimed at people who buy a property to provide tenants with a home.
While there has always been a risk associated with quick turnover in the sale of investment properties, there has been debate on how the bright-line test could catch people whose personal circumstances change unintentionally, and must sell their investment property within two years, triggering a tax bill.
Two other compliance requirements under the new rules are that non-residents and New Zealanders buying and selling any property other than their main homes must provide a New Zealand IRD number with the transaction, and non-residents must have a New Zealand bank account to get a New Zealand IRD number.
If you are planning to buy and sell property, our recommendation is that you always seek independent legal advice to help ensure your interests are protected.