Ominously, on Friday the 13^th of November, lawyers were advised that the government’s much-talked-about capital gains “bright-line” test is awaiting the assent of the Governor-General, which is the last stage in the lawmaking process.

It applies to transactions entered into after 1 October 2015.

Its purpose is to supplement the intention test in the current tax rules that makes gains from the sale of residential property taxable.  As it only applies to residential property, commercial property “speculators” needn’t worry.

Under the test, residential property disposed of within two years of purchasing will automatically be taxed for capital gains.  The two-year period runs from the date of settlement of the purchase to the date of agreement to sell.

The critical part is that intention is irrelevant: If the property has been purchased and sold within the two-year period then the owner must include the gain on the sale of the property in that party’s income tax return.

There are exemptions for main home transfers, for matrimonial property transfers, and for estates.  But there is no exemption for any hardship of the person that has required a forced sale of the property.  And a seller is only permitted two main home exemptions over the two-year period, with subsequent ones liable for tax (if there is a gain).

The discouraging aspect is that losses on a sale are ring-fenced and cannot be used to offset tax obligations of the seller.

This law is meant to be applied in conjunction with the Taxation (Land Information and Offshore Persons Information Bill).

Under this law, which has been operative for about two months, lawyers must collect tax information from buyers and sellers and pass information onto the government.  That information is intended to assist IRD to follow up on buyers and sellers of property who might have tax obligations.

This has meant that from 1 October 2015, all buyers and sellers of real estate (including commercial property) must provide a stack of tax information at the time of settlement.  The transaction cannot be settled until this information is provided.  Lawyers have turned into data collection agents of the State.  It is not a role lawyers wanted, nor asked for.  But we are now stuck with it.

Whether the new rules will fulfil their intended purpose is unclear as property price increases in Auckland have many variable contributors.

Yet, the new rules apply across the country, and not just solely to Auckland transactions.

It is difficult to imagine many property speculators lining up to make capital gains on property deals in Eketahuna, Tokoroa or Bulls.

A problem that is centric to Auckland probably required an Auckland solution.  But the IRD has a whip that stretches across the entire country.  And similar rules have been implemented in many other countries, and haven’t slowed property price growth there.

They are unlikely to here also.