Waikato Business News November/December 2017

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WAIKATO BUSINESS NEWS November/December 2017
5
The Government’s fight
for housing affordability
On October 19 the sixth Labour-led
Government was formed in coalition with
New Zealand First and the Green Party.
New ideas and policies
are being introduced
in the first 100 days of
Government and Labour has
announced plans to make significant
changes to the housing
industry in an effort to make
homes more affordable for
New Zealand citizens. Soon
we will see the establishment
of the Affordable Housing Authority,
the commencement of
the KiwiBuild project and the
passing of the Healthy Homes
Guarantee Bill in an effort to
give New Zealanders a better
chance at home ownership.
One of the key policies in
the Labour Party campaign was
restricting the impact of property
speculators in the New
Zealand market who, rightly
or wrongly, are suspected of
driving up the price of existing
housing stock. This has put
many Kiwis in an untenable
position in the auction rooms.
In response to this, Labour has
proposed three changes:
1. To increase the scope of the
residential property brightline
test from two to five
years,
2. To ban foreign speculators
from buying ‘existing’
homes in New Zealand, and
3. To stop taxpayers from
offsetting tax losses created
from negatively geared
housing investments.
The New Zealand media
has fed the public many policy
sound bytes and catchy headlines
but so far there is a lack of
fundamental detail on how the
proposed policies might apply.
The existing bright-line
test seeks to tax any residential
property sold within two
years of acquisition, with an
exemption for a taxpayer’s
‘main home’. During the election
campaign, the extension
of this bright-line test to five
years was often touted as a
silver bullet solution to speculators
and the inflated housing
market. However, outside this
bright-line test, the Income
Tax Act does already contain
a provision to tax speculators
who acquire property with an
‘intention or purpose of sale’.
The problem has been that it
is difficult, from Inland Revenue’s
perspective, to prove
what someone’s purpose is.
The bright-line test therefore
provides a clear benchmark
for both IRD investigators
and taxpayers to determine
whether any tax will be applied
on a property’s sale. Extending
the bright-line time period to
five years reduces uncertainty.
However, with such a long
time frame it is likely to capture
what are true property
investments held on capital
account.
The second policy change
is focused on overseas property
speculators. A modification
to the Overseas Investment Act
to class residential housing as
‘sensitive’, will mean ‘overseas
investors’ will now have
to request approval for the purchase
of an existing New Zealand
residential property. This
will be similar to the existing
rules in Australia, whereby
overseas investors can only
purchase ‘new’ residential
properties, ensuring their
money is directly invested in
the construction industry, increasing
overall housing stock
numbers. The detail is yet to
arise on how this will be implemented,
however we can already
see potential gaps where
foreign buyers may be able to
get around the constraint. It remains
to be seen whether this
will have a material effect on
the demand for NZ property.
The final prong of Labour’s
plan for speculative housing
investment is to stop taxpayers
from offsetting tax losses on
their rental properties against
their other income. This is
known as negative gearing and
is common. Speculators invest
in properties knowing that
their tax deductible expenses
(including mortgage interest)
on the property will outweigh
the rental income, giving rise
to a tax loss. The loss can then
be offset against their other income,
such as wages or interest,
to reduce their tax liability,
effectively subsidising the
rental loss.
The current proposal suggests
losses will be ring-fenced
to each individual property.
It is likely that quite detailed
rules will be required to ensure
the proposal works as intended.
For example, investors
could own each property in a
separate company, and use the
standard corporate loss offset
TAXATION AND THE LAW
> BY HAYDEN FARROW
Hayden Farrow is a PwC Executive Director based in the
Waikato office. Email: hayden.d.farrow@nz.pwc.com
rules to claim company losses
from one property against
profits from another. The new
rules would need to cater for
this type of planning.
Each change in isolation
is not expected to stop speculative
investment all together
and stabilise house prices. But
the proposed changes go hand
in hand and may have a combined
effect. We also have to
be mindful of the wider consequences.
The changes to the
Overseas Investment Act could
have a flow on effect on skilled
labour coming into NZ. A recent
addition to our team from
the UK has already commented
that if the changes were in
effect when she arrived, their
family would have likely gone
to a different country, as NZ
would have gone into the ‘too
hard basket’.
As we continue to creep
toward a capital gains tax, we
could reach a tipping point
where a broad based tax makes
more sense than the mix and
match approach that is currently
evolving….cue the upcoming
Tax Working Group.
The comments in this article
of a general nature and
should not be relied on for specific
cases. Taxpayers should
seek specific advice.
Music and lyrics by Ruth Wallis
Book by Steve Mackes and Michael Whaley
First produced Off-Broadway by Lawrence Leritz