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OPINION: Government sifts rubble of CGT for tax scraps

September 20, 2019


Partners Barney Cumberland
Senior Associates Paul Windeatt

Tax reform (Tax Working Group)

To the dismay of many of its supporters, the Labour-led Government could not advance the Tax Working Group’s (TWG) recommended general capital gains tax. That failure was due to lack of NZ First buy-in, which many anticipated even before the TWG was established.

Labour’s promise to establish the TWG was its major tax policy going into the last election. So with the TWG’s core recommendations lying in tatters, there seems to be a growing desperation to regain some credibility on tax among the Labour (and Green) support base.

Desperate measures

First we saw the proposal, earlier this year, to introduce a “go it alone” digital services tax. This remains under consideration, but has been met with near universal condemnation (see our comment piece here).

Earlier this week saw the release of a tax policy consultation document - “Habitual buying and selling of land”, with proposals to tighten certain exclusions from tax on land sales. These proposals are in reality very modest in scale and we suspect (like a digital services tax) fiscally insignificant. Measures of this nature would normally be included as “remedial items” at the end of a more wide-ranging policy document. The fact that a stand-alone discussion document was issued smacks of an attempt to overplay their significance.

Okay, but what is proposed?

Under the so-called “bright-line” test, if a residential property bought on or after 29 March 2018 is sold for more than cost within 5 years of being purchased, the sale gain may be taxed. But that gain will not be taxed where the property was used by the seller as their “main home” for most of the time it was owned. However, the “main home” exclusion is not available to a seller who has engaged in a regular pattern of acquiring and disposing of residential land.

Similar tax exclusions, also with regular pattern restrictions, can also apply to otherwise taxable gains on residential land sales made by land dealers, developers or builders (or persons associated with them).

The Government is apparently concerned that the regular pattern restrictions are being structured around by the use of associated persons (eg the person buys one property, the person’s partner buys the next property and a family trust the one after that). How prevalent such structuring may be is not discussed.

The Government proposes to broaden the regular pattern restrictions so that they apply where a person, or a group of people or entities, has a regular pattern of buying and selling land that has been:

  • occupied by the person or group of people as their main home, residence or business premises (as applicable); or

  • occupied as a main home, residence or business premises (as applicable) by the person or group of people that “controls” the entity (eg a trust or company) or entities that own the land.

The consultation document does not explain what is meant by “control” in this context, although it can be expected that control would include the power to appoint or remove trustees of the trust or where the person (and/or associated persons) in aggregate have a threshold level of voting interest in the entity or entities.

While the consultation document invites submissions on the latest proposals, we expect that the general thrust of the proposals will be enacted – perhaps by the start of the next tax year on 1 April 2020.

To be fair, the tenor of the proposals is not controversial, but as noted they are hardly a game changer.

What’s next?

Another proposed land related tax measure is expected soon, likely aimed at vacant residential land (and perhaps also under-used urban land).

Following on from another TWG recommendation, the Government has asked the Productivity Commission, currently undertaking an inquiry into local government funding and financing, to consider whether a tax on vacant residential land would be a useful mechanism to improve the supply of housing for New Zealanders.

The Productivity Commission is now considering submissions received on this issue, having unpromisingly flagged that the meaning of “vacant” is problematic, and it must provide its final report to the Government by 30 November. We expect the Government will want to move forward quickly in this area (if the Commission supports the TWG), and in any event before the next election, in order to add it to its humble list of achievements in the tax arena.