Beware of the Taxman
This article was written by Alan Prescott
Since 1st October last year the taxman has had a range of new measures made available to him that ensure that taxpayers trading in property pay tax on their profits.
The Government introduced these measures to ensure that house owners, particularly overseas residents operating in the Auckland housing market, paid tax in New Zealand on any profits they made. In reality the measures go far beyond that and deliver to the taxman a powerful tool to monitor all property transactions in New Zealand. The taxman will now be able to identify which taxpayers are engaging in a pattern of trading property. Coupled with the increased compliance budget available this spells the end of traders “slipping one past the taxman”.
The Tax Information Act, which came into effect on 1October 2015 makes it a requirement that a tax statement is given by buyers and sellers of property before the transfer can be registered on the title.
The statement includes information about whether there is a house on the land and whether the person giving the statement is a New Zealand citizen or resident. In many cases the purchaser or seller must disclose their IRD number.
The only time an IRD number is not required is when the property is the buyer or sellers main home. That exemption does not apply to trusts.
Buyer and seller IRD numbers are required even if the property being sold does not have a house on it. The taxman will collect information on the selling and buying of properties by commercial landlords.
The information is passed on to the Inland Revenue Department. That information is then used to enforce the new Brightline tax test for residential land. The Brightline test taxes gains on residential property or land sold within two years from when it was acquired. The test applies in respect of property purchased after 1 October 2015.
Tax is not payable on the main home provided no more than two main homes have been sold in the previous two year period. Profits on rental properties sold within two years will be taxed. This applies even if the sale is forced by the bank or is due to the owner falling on hard times.
One thing is clear. The taxman now has a significantly expanded arsenal with which to detect and tax people who are engaged in a regular pattern of buying and selling property. Extreme care will need to be taken when buying and selling property to ensure that you know the tax consequences.