Comment permalink

Photo: RNZ
Governments had not enforced this in the past because they argued it was too hard to know a buyer's intention at the time of a purchase. Photo: RNZ
Prime Minister Jacinda Ardern might have ruled out bringing in a capital gains tax, yet there is already a tax on the books that could do the job instead.

That's according to two University of Auckland researchers, who say section CB6 in the Income Tax Act has existed since the 1970s but was little-known because it was rarely enforced.

Yet - if given a simple tweak - it could be turned into an effective capital gains tax targeting the profits investors made when buying and selling homes, Michael Rehm and Yang Yang said in a new research paper.

They argued recent skyrocketing house prices had thrown taxation debate back into the spotlight.

And rather than considering new taxes, section CB6 already stated that anyone buying land with the intention of profiting from its resale should pay income tax on the gains, Rehm said.

Governments had not enforced this in the past because they argued it was too hard to know a buyer's intention at the time of a purchase.

Yet Rehm said his decade-long analysis of Auckland rental home purchases showed nearly all made initial losses and relied on a profit at resale to be considered wise financial investments.

"These things on a cashflow basis are complete dogs," he said.

"The only rhyme or reason you would invest in property is you are hoping to get some sort of payout at the end."

That meant investors could safely be said to be acting as speculators hoping for house prices to rise - and that had wider ramifications for society, Rehm said.

Auckland's median sales price had now soared to $1 million for the first time in October, while national prices also ballooned to a new high, the Real Estate Institute reported.

These types of price jumps were increasingly transforming housing from a place where Kiwis sought shelter and raised their families to a golden goose that people treated as nest eggs, Rehm said.

That had two problems.

It helped create a rift in society between the haves, who owned property, and the have-nots, Rehm said.

And it funnelled billions of dollars of investment away from KiwiSaver accounts, stocks and businesses and into housing, where it produced less widespread economic benefits, he said.

Politicians across much of the political spectrum had expressed similar alarm at rising prices.

Labour, the Greens and even the Reserve Bank this week suggested wider taxes were needed to help curb house price rises.

Investors were already subject to a capital gains-like tax in the form of the so-called brightline test.

First introduced by the National Government in 2015, it initially required a property investor selling a home within two years of the purchase to pay tax on their gains.

In early 2018, the Labour-led Government then extended the brightline test to five years.

Last week, Finance Minister Grant Robertson asked Treasury to investigate extending the brightline test even further.

Yet changing taxation policy was fraught with political risks, given opposition parties were now accusing the Government of backtracking on its promise to not introduce any new tax.

Labour's Housing and Revenue Ministers didn't reply to questions about whether they would consider investigating or implementing Rehm and Yang's suggestions.

Inland Revenue said it commissioned a "very similar" study in 2014.

"It concluded that there was systemic evidence of rates of turnover of residential properties, which were higher than normal," it said.

"However, identifying probable speculative activity based on analytics and having enough evidence to prove speculative behaviour are two different things."

Rehm acknowledged that - while section CB6 already existed - enforcing it politically was another matter.

"I'm not naive, I know it is a bitter pill for any politician to invoke," he said.

"I'm just trying to point out there is a solution already there on the books."

He said enforcing section CB6 would be more thorough than the brightline test because it had no time limit and also argued the analysis behind his paper was thorough.

His team used a new method to identify 117,000 rental property purchases in Auckland between 2002 and 2016, he said.

To calculate the profitability of rental purchases, his team then considered the expenses involved in running a variety of properties - such as home loan repayments, property management fees and maintenance costs - against income from rents.

The results were clear, he said.

Rental property investments almost always turned out poorly against comparable investments when capital gains were excluded, Rehm said.

That meant everyone was speculating on a hope prices would rise, he said.

"We beat our chest and say speculation is a bad behaviour and it needs to stop," he said.

"Yet nothing is done to try to persuade people against continuing to speculate."

Comments

View all

Exactly, it is rarely enforced and why is that? If it is in the taxation books why had IRD so ignored implementing it for now fifty years?? What has politics got to do with this rule any more than any other taxation rule - does politics favour the non-paying of earnings made from the intent of making a profit? How does this tax really differ from the wage earner needing to pay tax. Equity of the tax system is in everybodies interest.

When you make a profit, it's classed as income and you should get taxed.

CB6 will not apply where there is simply a recognition that the person may need to dispose of the land at some future date.For CB6 to apply,the person must have reached a decision to dispose of the land,or a part of the land at the time the person acquired the land.The mere possibility of a disposal at some future date is not enough to amount to a purpose or intention of disposal.IRD must be able to obtain evidence of the taxpayers intention at time of purchase

I hear less than a quarter of those caught by the ‘brightline tax’ are coughing up. Seems the tax department are having to chase the dodgers, good luck with off shore speculators! I say tax all property sales and let the vendor apply for exemptions where they are due. Simple! Just like our wage and salary earner tax regime. Level the playing field so everyone gets a fair deal

Solicitors should be advising on this topic as part of their conveyancing duty. Early on, not all solicitors were aware of Brightline. IRD is issuing alerts to Tax Agents which include taxpayers who have had a Brightline Sale prior to 31/03/20. About 50% of 2020 returns have yet to be filed. Others on those list have not sold until the 2021 taxation year. Still others are taxable under other Land Taxing Provisions so have not completed an IR833. Others are not liable because IRD does not have the correct technical dates which apply to a sale or qualify for an exemption. I do not believe that only 25% of such sales are actually returned. I would be surprised if 75% were not returned.

Cool the market by stopping equity in one property being used to buy another.

View all

 

suv-updated-banner_1.jpg

Our journalists are your neighbours

We are the South's eyes and ears in crucial council meetings, at court hearings, on the sidelines of sporting events and on the frontline of breaking news.

As our region faces uncharted waters in the wake of a global pandemic, Otago Daily Times continues to bring you local stories that matter.

We employ local journalists and photographers to tell your stories, as other outlets cut local coverage in favour of stories told out of Auckland, Wellington and Christchurch.

You can help us continue to bring you local news you can trust by becoming a supporter.

Become a Supporter