A succession of tax experts trooped into Parliament yesterday and told a Select Committee that the Government’s show-piece “brightline” test on property speculators was unfair and would not work.
The tax which was rushed through Cabinet just prior to the Budget imposes income tax on gains made from the sale of residential property except the family home which is sold within two years of purchase.
It was designed to toughen up existing law which requires Inland Revenue to establish that the purchaser intended to sell the property for a speculative gain when they bought it.
Steven Tomlinson, from the Tax Committee of the New Zealand Law Society told the Finance and Expenditure Select Committee that the Society agreed with the Government that speculators should pay their fair share of tax.
“But the Law Society’s view is that the Bill will be ineffective in achieving that aim,” he said.
“It is only expected to generate an additional $5 million per anum in revenue and that is simply because speculators will change their behaviour.
“Those people most likely to be caught in the two year brightline test are those person who are not speculators but who have had to sell property because of circumstances that hadn’t arisen at the time they acquired the property … financial hardship, marital status or change of location.
“They seem to be the collateral damage.”
Mr Tomlinson said the brightline test was a “bad idea”.
“It shouldn’t be enacted and in our view it will be ineffective in meeting its stated objectives.”
Peter Vial, Tax New Zealand Leader at Chartered Accountants, Australia and New Zealand, said he didn’t think the brightline test was sound tax policy.
“We think it is somewhat arbitrary and will produce unfair outcomes,” he said.
“It is a blunt instrument and we note the low revenue projections.”
Many of the submissions focussed on clashes between the proposed legislation and existing tax law relating to definitions.
David Snell, Executive Director, Government Administration from the accounting firm, EY, said he was “professionally confused.”
“The new rules and the old rules will have to work together and we don’t consider that this interaction and sequencing is very clear at the moment,” he said.
“We feel that the rules are overly complex.”
Mr Snell pointed out that the new legislation before the Committee did not “switch off” existing legislation which allowed Inland Revenue to levy income tax on property sales if they could establish the property had been bought with the intention of speculative sale.
“The new rules and the old rules will have to work together and we don’t consider that the interaction and sequencing is that clear at the moment,” he said.
Several submitters focussed on the unfair outcomes. And Mr Snell pointed out that even people who were forced to sell under a mortgagee sale or had their property compulsorily acquired would be eligible to pay the tax.
The Greens’ Julie-Anne Genter asked Mr Snell whether farmland should be included in the tax but he said EY did not have a view on that.
It was left to Andrew King from the Property Investors’ Federation to put the case for the “mum and dad” property investors.
Perhaps surprisingly he basically supported the proposal.
He argued that the bill was aimed at property traders and speculators whereas his members were rental property owners.
”We are investors, we provide homes for tenants,” he said.
“That is not something that is widely appreciated by the general public.
“We often get accused of not paying our fair share of tax and so we like things like this which actually show that we are different from speculators and we certainly would like to see speculators and traders pay their fair share of tax.
“The problem is that though it is aimed at traders and speculators it is applied against us.”
Mr King said that the effect of the tax on his members would be to potentially raise their costs and thus rents would have to rise.
So he proposed that the term to which the brightline apply (two years) be reduced to one.
That way his members who were forced by circumstance to see their property early would not be affected.
He also suggested that an exemption for hardship such as terminal illness or losing a job be allowed.
The Committee chair, David Bennett, and members of the Committee, seemed impressed by the submissions and Mr Bennett referred several of them to Inland Revenue for a commentary.
He particularly described the Chartered Accountants submission as a “very good submission” which he promised he would get checked.
That contrasts with the same Committee when it heard from Mr Snell in July over the requirement that offshore investors have IRD numbers.
Mr Snell said that should apply to all property purchasers — a suggestion that it was later to emerge was supported by both Treasury and Inland Revenue.
But the Committee ignored it.
The Bill is due to be reported back to the House in three and half weeks which does not leave much time for any radical redrafting.
That raises the question of subsequent amending legislation which some submitters thought was likely.
The whole package of measures announced by the Prime Minister on the Sunday before the Budget has shown every sign of being rushed. Some of the officials’ advice was rejected and previous professional advice to the Select Committee was also ignored.
The measures apply from October 1 (the brightline test will be introduce by retrospective legislation).