Some homeowners may get caught up in the Government's proposed bright-line test, particularly if they are habitual renovators who buy and sell a home within a two-year period.
Inland Revenue and the Treasury jointly released an issues paper seeking submissions on the proposals announced earlier this year to introduce a bright-line test for property sales within two years.
Deloitte Dunedin tax partner Peter Truman said the new test supplemented the intention test that had always been a feature of the land taxing provisions.
''In effect, the Government is saying that if you sell within two years of acquisition, we will deem your primary intention was to dispose of the property at a profit. This approach can be seen as a fair outcome in the majority of cases.''
However, there would also be genuine reasons why property had been sold within two years, such as health issues and work transfer opportunities.
Further guidance was required on the main home exemption, he said.
While the basis was for determining whether the residence was the main home, further clarification was required as to the time at which the test applied and whether there were any anti-avoidance provisions required around homes becoming main homes for only a short period immediately prior to the sale.
New Zealand Property Investors Federation chief executive Andrew King said habitual renovators would have the new bright-line test applied against them, as well as traders and speculators who never lived in the property.
''Anyone who frequently buys a home, and does it up while living in it then sells for a profit, is really running a trading business. These people should be taxed under existing law.''
The bright-line test made that clear, he said.
It stated if a home renovator bought and sold a home more than twice in a two-year period, they would be deemed a trader and tax would apply on any profit they made.
The test was not aimed at people who bought a home to live in long-term or people who bought a property to provide tenants with a home.
''People need to realise there is a clear difference between property traders or speculators and property investors.''
Mr Truman said it was intended the new provision would apply in the following situations:
• There was a disposal within two years of acquisition.
• The land was residential land.
• The property was not the main home of the vendor.
There were exceptions proposed where property had been acquired through an inheritance.
Also, where property had been acquired under a relationship property agreement, the original purchase date of the property was used to determine whether the two-year rule applied.
Gain on the sale of property covered by the two-year rule would be subject to tax at the vendor's marginal tax rates.
Where a loss was incurred, the loss would be ring-fenced and would only be available to offset future gains taxable under any of the land taxing provisions.
Anti-avoidance rules were proposed to prevent losses being claimed on sales to associated persons, Mr Truman said.
That prevented losses being manufactured in situations where the property value had fallen but where there was no intention to sell the property to a third party.
There were anti-avoidance rules proposed where shares in a land-rich company were sold or where there were changes to trusts seeking to circumvent the rules.
The issues paper provided some guidance on what expenses were deductible against taxable property sales, noting that apportionment would be required where the property had been used privately.
The guidance needed to be expanded to provide a practical basis for apportioning costs in those situations, Mr Truman said.
Bright-line rules
Definition
A bright-line rule (or bright-line test) is a clearly defined rule or standard, composed of objective factors, which leaves little or no room for varying interpretation.
The purpose of a bright-line rule is to produce predictable and consistent results in its application.
At a glance
• Submissions on the Government's bright-line test for property sales close on July 24, with new provisions to apply from October 1.
• Property buyers who buy and sell a residential property within two years will be taxed on their gains.
• The consultation paper proposes new definitions of residential land and main home.
