The Government confirmation on Monday that it was going ahead with the brightline test to cfrack down on property speculation has also been watered down by decisions taken to exempt New Zealand residents from providing their IRD numbers when buying or selling a house.
It has already been established that the Cabinet ignored the advice of the Ministers of Revenue and Land Information and their departments and decided to exempt New Zealand residents from having to provide their Inland Revenue Numbers on house sales.
The move is part of package of measures announced in the Budget designed to cool the Auckland housing market.
Not only did the Ministers, Todd McClay and Louise Upston, oppose the move but also the accounting firm EY who told a Select Committee it would simply open up loopholes.
Now in other documents released by Treasury under the Official Information Act it is clear IRD wanted New Zealanders also to have to provide the numbers so the department could better crack down on property speculation and landlords dodging tax on rental income.
Treasury supported that proposal.
“This policy would make it easier to track down information on those buying and selling property to enable tax to be collected more easily on taxable gains and rental income,” notes prepared for Mr McClay to use at Cabinet before the policy was announced said.
Inland Revenue said having both New Zealand residents and foreigners provide the IRD numbers would help IRD identify properties where rental income should be expected to be returned and identify situations where the money used to purchase a property “does not have clear provenance, for example where there is not sufficient declared income to support the purchase.”
Inland Revenue said that if this was done it was likely to have an imapct on the hosue market in Auckland by restraining demand.
And in his final Cabinet paper on May 18 Mr McClay was even more explicit.
“The primary purpose of this legislation is to ensure compliance with property tax obligations,” he said.
“I have discussed with this with my colleagues and they agree that offering New Zealand residents the option of not providing an IRD nuymber would create a loophole that could be exploited by property investors seeking to avoid scrutiny of their activities.
“Given this I have instructed that the Bill does not include an opt out provision for New Zealand residnets.”
But some time after the Budget, someone – presumably a senior member of the Cabinet – over ruled the relatively junior Ministers McClay and Upston and exempted New Zealand residents from having to provide the IRD numbers.
The Cabinet also rejected an initial proposal that the “Brightline” test, which would impose a “back door capital gains tax” on properties purchased and sold within three years have any profit taxed at the seller’s marginal income tax rate.
That was reduced to two years though officials supported that reduction.
There were additional problems with the requirement that overseas residents have a New Zealand bank account before they could get an IRD number.
“We are considering reforms in the area of internet commerce to encourage overseas providers of services over the internet such as Netflix to register for GST so providing their services to New Zealanders will be subject to GST,” Mr McClay said in a pre-budget Cabinet paper.
“Treasury considers that it is not advisable to add additional hurdles to discourage such non residents from obtaining IRD numbers.”
It is clear from all the papers that Treasury have now released that the Budget housing package was watered down largely by Cabinet but also partly by pressure from some officials.
Cabinet’s motivation may have been simply political with figures produced on Monday by the Reserve Bank showing that 40% of recent house purchases in Auckland were to property investors.
That group forms an important part of National’s vote.