Despite the interruption caused by the Covid-19 pandemic, New Zealand house prices skyrocketed in February. According to the Real Estate Institute of New Zealand, the national median house price rose $50,000 in February 2021 while the median house price in Auckland went up by $100,000.
The property market in Auckland sold 2775 houses in February; this is the highest sales volume for February in 14 years. Before you jump on the wagon of property “flipping” or ponder on using your properties as rentals, it is important to consider the potential tax issues that may arise to avoid any surprises.
Tax department's approach around property compliance
In 2015, the Government announced that additional funding will be provided to increase focus on the tax collection of residential property held for less than five years. For the 2016 year, it was reportedly assessed that additional tax owed in property transactions was over $70 million and surpassed $100 million in the 2017 financial year. In addition, from 1 January 2020, an IRD number will be required on nearly all land transfers.
This demonstrates the tax department’s determination in policing property compliance and gaining greater oversight of property transactions. From our experience, the tax department predominately focuses on residential property “flipping” in the high-risk markets, particularly Auckland.
The Bright-Line Tests
The two-year 'bright-line test' was introduced by the Government in 2015 and further extended to five years in March 2018. Broadly speaking, a property sale transaction will be subject to income tax on the gain made on sale if one of the following situations applies:
There are exemptions available, for example if the sale of the property caught under the bright-line test is your main home or inherited property.
The rules may appear simple but there are a few “fishhooks” that will catch unsuspecting taxpayers. For instance, there are specific rules around the definition of date of acquisition/disposal for the bright-line rules and what happens if a single property has been used by you partly as a residential home and partly as a rental property
Bright-Line Tests and Trusts
The application of the bright-line tests and the main home exemption become more complex if trusts are involved. There are additional requirements that both the properties and the trust must meet to ensure that people cannot manipulate the main home exemption.
Broadly, if your family home is owned by a trust, the main home exemption will apply if the family home is occupied by the beneficiary of the trust; however, if you are the settlor of the trust and you own in your capacity another property as your main home, then the main home exemption cannot be used on the property owned by the trust.
Ring-fencing of residential property losses
In an attempt to level the playing field between homeowners and investors, the Government introduced a new law that ring-fences rental property losses. Essentially, after 1st April 2019, you can no longer offset tax loss from your rental properties against your overall income. Instead the loss is ring-fenced and can only be deducted from future property income. These rules also extend to overseas rental properties – and beware of the impact of unrealised losses on foreign denominated mortgages.
GST issues for properties used for short-stays
Although residential rental properties are not subject to GST, properties rented out on a short-term basis on popular platforms such as Airbnb are subject to GST if the income is over the $60,000 threshold. There are further special rules for mixed-used assets such as your holiday homes and baches.
Once a property is included in the GST nest, GST consequences also arise on the disposal of the property or upon cancellation of GST registration.
Owning overseas properties
An important point many people have overlooked is that overseas residential property owned by a New Zealand tax resident is also subject to the bright-line tests. This means if you are a New Zealand tax resident, and you sold your overseas residential rental property within the bright-line period, any gain made on the sale will give rise to a New Zealand income tax liability.
Another common misconception is that rental income generated from overseas property is not subject to New Zealand tax. It is important to remember New Zealand tax residents must pay tax on their worldwide income and not just income with a source in New Zealand.
The income tax and GST rules concerning property-related transactions are complicated.
The easiest way to get some comfort and certainty on any proposed transaction is to talk to your tax advisors or give us a call. We would be happy to provide guidance to you and ensure that your tax liabilities are being managed correctly.
By Graham Lawrence (Director) and Harriet Zhang (Senior Tax Consultant)
