I know. The year’s barely started, and here am I wanting to tax those post-holiday brain cells with news about, well, tax. But, given the property season is in full swing, this is one you might just need to be across sooner rather than later, if you’re looking at trading.
The alert? The much-talked-about “bright-line” rule, recently introduced as part of the new property tax regime, is already proving not quite as straight or clear-cut as its name would suggest.
By way of recap: last year’s property tax overhaul involved three pieces of legislation – the first two, the Tax Administration Amendment Act and the Land Transfer Amendment Act, are centred on information gathering. The third, the Taxation (Bright-Line Test for Residential Land) Act, was implemented last month, touted as the definitive benchmark – hence the term “bright-line” – on which properties will be up for tax on any profits made at sale, and which ones are exempt.
Anyone who followed the unfolding of these new laws might remember there were quite a few cries of “hold your horses” as this legislation bolted through the system. Alas, the lawmakers saw things differently, and kept up the lightning pace, despite the concerns around potential anomalies the incoming legislation posed.
Janice’s Lesson Number 1: Before we get into some of the emerging fish hooks, there’s one important timeline to note. The original plan was that all properties traded in the two years prior to the Act’s implementation would be fair game, but the Government’s decided better of it. The provisions of the Act, which came into force in mid-November, are still backdated, but only to October 1, 2015.
Look before you leap
Now, back to that not-so-bright-line rule. The ink’s barely dry on the legislation and we’re already encountering situations that are not neatly covered by the law – and I can see plenty of potential for further difficulties, especially for those who launch head-long into a property transaction, thinking – and not unreasonably – that they qualify for an exemption.
You might remember the key exemption grounds are that the property is the main home, has been inherited or is part of a relationship property settlement. However, property transfers where there’s a link with a third party or bare land are proving potentially problematic.
Janice’s Lesson Number 2: Some of the cases that I’m coming across involve properties that logically meet the “main home” exemption, but because there’s a third party or bare land involved, all’s not cut and dried. For example, it’s not uncommon for a young family to have friends or family lend a short-term financial hand to build a family home, especially for those who are self-employed and whose books, an important consideration for banks providing loans, can vary from year to year.
Sticking points
However, in some situations where there’s a build in progress, and someone has gone guarantor until the home is completed, matters are proving less than straightforward. A case in point: a guarantor is needed, as part of the bank’s requirements, to be an owner on the title during the time they guarantee the property. The home, on completion, however, is hopefully going to be refinanced, the guarantor’s interest in the property released and the property transferred to a family trust. The property is obviously not the guarantor’s main home, and, because the guarantor is neither a settlor nor beneficiary of the trust, there’s no exemption cover. Taking all that into account, the property could be technically traded within the bright-line rule’s two-year threshold, which, on the face of it, then has no exemption and means the property owners face an unexpected tax bill.
Such scenarios were flagged during the submissions around the new legislation. The concerns fell on deaf ears. The new laws were meant to target the likes of property investors and speculators flicking houses and making vast tax-free profits. Let’s be clear – the scenarios I’m coming across don’t involve anyone making any profits and we’re not talking sale situations; we’re talking transfers on the land register. Still, not handled correctly and in good time, parties could find themselves exposed, unwittingly, to the provisions of the new laws.
Janice’s Lesson Number 3: What’s particularly challenging is that, because this legislation is so new, these anomalies are still coming out in the wash – so, there are no test cases to lead the way, and, funnily enough, no-one’s chomping at the bit to play guinea pig. However, we expect the relevant Government departments to start stumping up, sooner rather than later, with guidance around the various quirks.
If in doubt …
Until then, it is what it is, and we have to take the legislation at face value, with little-to-no room for interpretation. The key is: if you’re in any doubt at all about your exemption status, check it out. There are legitimate workarounds in many cases, but to use them, we need to know the situation at the outset to structure things appropriately.
Another oddity that’s had me, and a few clients, scratching our heads is around the Government’s information-gathering on who’s buying property in New Zealand. A question designed to ascertain if the buyer is a Kiwi is all well and good, but the governmental advice is, if it’s a company buying rather than an individual, then simply tick “no”. Surely, then the statistics are skewed? Or, maybe it’s just all too early in the year …
