How not to help tenants

I’m going to bore you all to death again with another article about taxation – although it may make a change from the discussions about the National Party’s leaders race. But this is something that, with all the noise about possible leaders for National and the Prime Minister’s Vogue photo shoot, seems to have slipped under the radar. Never fear, your trusty, boring accountant will save you once again.

Government is extending the amount of time for which investment properties must be held before their owners can avoid capital gains tax  despite a warning that it could be bad news for renters.

Revenue Minister Stuart Nash confirmed the “bright-line” test would be extended from two years to five in legislation working through Parliament.

“The extension of the previous government’s bright-line test will help dampen property speculation and make homes more affordable,” Nash said.

He said reducing speculative demand would help to improve affordability for owner-occupiers.

Oh yeah? And how will it do that exactly?

Gareth Kiernan, chief forecaster at Infometrics, said the rule change would make a difference. A two-year limit would stop people who were flicking properties on in a speculative boom, but two years was not a long time to have to plan to hold a property.

“With five years, that’s quite a long-term decision you’re making there.”

Andrew Bruce, president of the Auckland Property Investors Association, said most of his members were buy-and-hold investors who planned to hold a property for many years.

People who were buying and selling within a short time period were already being caught by the intention test – which enabled Inland Revenue to apply capital gains tax, even before the bright-line test was introduced, if it could be shown that an investor bought a property planning to sell it.

And that is the point.

The Bright Line Test was introduced in October 2015, primarily to slow down speculation in the Auckland housing market. It was feared that landlords were buying property ostensibly for rental returns, but were actually planning to sell them on fairly quickly for a large profit. Hence the rule that, no matter what, if a property that is not the family home is bought and sold within two years, tax is paid on any profit on the sale. No exceptions.

People doing that are tax evaders of course but, as I well know, as I advise many clients on this, it is hard to prove or disprove intentions that are only in your head.

I have to admit, I was surprised a National Government introduced this rule.

In some ways, this rule is fair enough although I always worried that personal circumstances can change suddenly, and the Bright Line Test could mean that the Government takes a chunk of money from people who had no intention of making a killing on a property, but circumstances forced the sale.

If I was worried about that happening inadvertently within two years how do you think I feel now that the time limit is to be increased to five? A lot of things can happen in five years.

Your partner may die.

You may go through a relationship break up.

You may lose your job.

You may become incapacitated.

The rental market might tank.

Rent controls may be introduced.

You may have been intending to sell within five years because, after all, that was absolutely OK – until now.

I’m only just getting started. And there are lots of scenarios that have not been considered, at least, not as far as I know. What happens when someone dies? When someone is made bankrupt? When there are changes to a Trust? And so on – ad infinitum. And yes, any of those things could have happened within two years as well. But looking down the track for five years well, who knows what will happen?

Here is my prediction for all of this. There will be a rush by landlords to sell their properties before this rule comes in. I am assuming it will be introduced at a date sometime next year. And then, I will also predict that there will be very few landlords game to buy new rental property. The current supply will reduce even further, and the number of new properties available to rent will be … not many. Few landlords are going to be stupid enough to buy into the rental market without a smart exit strategy, if needed that will last more than five years.

Because there is one other thing that I have not yet pointed out. If a full Capital Gains Tax is introduced, it will be at a set rate – probably something like 15%. But, when a property attracts tax on the profit on sale under the Bright Line Test, the tax is at the seller’s marginal rate which is 33%, in most cases. Most landlords will be screaming for the introduction of Capital Gains Tax because it will cost them less.

So how are all your tenants going to fare now, Jacinda? Never mind, you must have a photo shoot with the Australian Woman’s Weekly coming up soon. Much more important.

Jacinda clapping gif-Credit Whaleoil

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Accountant. Boring. Loves tax. Needs to get out more. Loves the environment, but hates the Greens. Has been called a dinosaur. Wears it with pride.

To read my previous articles click on my name in blue.