Investors experience bright-line blindness
Compliance with the two year bright-line test could be as low as 66 percent - and getting worse - according to documents released by the IRD, Thomas Coughlan reports.
The bright-line test, a key part of both National and Labour’s strategy for addressing the housing crisis, is being flouted by as many as a third of the people who should be paying it.
The test, which came into effect in late 2015, is designed to crack down on property speculation by automatically taxing profit made on residential property (other than the main home) that is sold within a set time since purchase. Initially it applied to property sold within two years but earlier this year the Government passed legislation extending it to property sold within five years.
An IRD submission to the Tax Working Group says that a review and audit of property sales in the 2016 tax year found just a third of sales where the bright-line test should have applied were compliant.
The IRD also noted that voluntary compliance appeared to be getting worse. It estimated that in the 2017 tax year as many as 2,625 sales that may be subject to the test had yet to file a return.
This represents a voluntary non-compliance rate of 71 percent, up from 66 percent in the previous year.
The tax man cometh
IRD noted it had attempted to contact property vendors involved in 500 of the 2625 transactions that had not voluntarily complied with the test and been successful in contacting 427.
But even if all of those 427 cases were either found to be exempt or made to file a return, this would still leave 2198 cases that had not voluntarily complied, a rate of 59 percent.
IRD noted it was possible that the longer the period a property was held for, the less likely sellers would be to consider the proceeds taxable.
This is a particularly live issue for the Government after the passing of the legislation extending the bright-line test from two to five years.
Wilful blindness by investors
Deloitte Tax Partner Patrick McCalman said the 2017 results showed compliance potentially deteriorating.
He said the low compliance rate showed the need for greater IRD resourcing to both educate taxpayers about their liabilities and to enforce the tax against those who had not paid.
“The Government cannot just write a rule and say ‘this revenue will come to me',” McCalman said.
Deloitte’s National Technical Director Robyn Walker said compliance should not require a great deal of resource. Property sellers were given key materials they needed to comply.
McCalman said non-compliance could be the result of “wilful blindness”.
IRD receives property transaction data from LINZ, giving the organisation a detailed picture of who may or may not be compliant.
McCalman said this meant those who flouted the test did so at their peril.
“Someone who is not compliant in this area with an absolute degree of peril because every land transaction is recorded, so they are leaving a footprint behind that Inland Revenue can follow,” he said.
Capital Gains taxes not worth the effort?
Baucher Tax Consulting director Terry Baucher said he was not surprised at the high rate of non-compliance, but described it as “towards the high-end”.
He said that taxes that had more complex rules tended to have higher rates of non-compliance.
He noted the issue was playing out against the backdrop of the Tax Working Group’s consideration of a capital gains tax (GCT) on all property transactions excluding the family home.
He said IRD was known to be opposed to capital gains taxes as not being worth the amount of effort they take to enforce.
Treasury, by contrast, was more supportive, seeing a CGT as a mechanism of the broad base, low rate system New Zealand aspires to. This is a system in which people are encouraged to comply because of generally low rates of tax and few grounds for exemption.
McCalman said that the idea of a no-exemption CGT was a “theoretical conversation”.
“It’s just one that’s not going to happen – the reality is that we are going to have exemptions to a capital gains tax,” he said.