By Frank Newman on 7th June 2015
The IRD is getting serious about collecting its “fair share” of tax from property investors.
In the last five years its property auditing activities have collected $258m in additional tax. So it’s not surprising a cash-strapped government has allocated an additional $29m to increase their auditing activities. In total the IRD expects to collect an additional $420m over the next five years.
This should be a wake up call for property investors to make sure they are on the right side of the tax law. What is fairly clear is that some property speculators and traders have conveniently turned a blind eye to the capital gains tax issue, perhaps hoping uncertainty may help their argument.
That uncertainly revolves around the intention test. Basically the rule is if an investment is made with the intention of resale then any gains from the sale becomes income for tax purposes. That applies to all investment types, not just real estate.
The difficulty is intention is a state of mind and difficult to prove unless the investment is structured in such a way that makes intention transparent or evident from third party correspondence.
As far as residential investment property is concerned, Budget 2015 introduced greater clarity to the “intentions” test by determining that the gains on the resale of a residential investment property will be taxable should the sale occur within two years of purchase. There are some exemptions, and the finer points will be clarified before 1 October.Some people have mistakenly interpreted this change as meaning all gains will now be tax free if the sale is outside of the two-year time frame. Not so. The intentions test will remain and the IRD will now be applying it more rigorously.
The IRD has about 50 people in their property investigations team. Most of their attention is in the hotspots like Auckland and the Lakes District in the South Island, but they are spread throughout the country.
As a general rule, those who buy property to renovate and sell will be liable to tax on the gains. It does not matter if you live in the property or own it as an investment. Nor does it matter that its just one property, how long you own it, or if rental income is received. If the intention was to make flick it on for a tidy profit, then the gain would be taxable.
Where a taxpayer claims an investment was made with long-term rental income in mind, but the facts suggest otherwise, the IRD will come to its own opinion about intention and it will be for the taxpayer to prove otherwise.
The IRD keeps a special eye on new developments where land and building packages are sold upon completion, or where land is purchased with a few thousand dollars down and sold before or shortly after title comes through.
What remains clear is property investors that adopt a ‘buy and hold’ strategy for the purposes of building a rental income stream are not likely to get caught by the intentions net. They will however, be liable under the two-year rule – regardless of their intentions at the time of purchase.