Bright-line test unfair to taxpayers, says NZ Law Society

by Miklos Bolza25 Sep 2015
The recently proposed bright-line test has been criticised as unfair with the New Zealand Law Society saying it will detrimentally affect local taxpayers who need to quickly sell property within two years of purchase due to unforeseen personal circumstances.

While the bill itself is intended to target real estate speculators failing to meet their income tax obligations, Stephen Tomlinson, spokesman for the NZ Law Society, said that ordinary taxpayers were more likely to be negatively affected.

Impacts were possible for those who didn’t fall within an exception such as selling their primary home or inherited property or transferring a property under a relationship property agreement.

“It is likely that the proposed bright-line test will subject the sale of land to tax where the taxpayer genuinely did not have a purpose or intention of disposal at the time of acquisition,” Tomlinson said.

“However it will not catch speculators who are currently not meeting their income tax obligations, as they will simply change their behaviour so that land will not be disposed of within the two-year period.”

Officials have criticised the current disposal test in section CB 6(1) of the Income Tax Act 2007, saying it is too difficult to enforce due to its subjective conditions. They claim the bright-line test will do away with this issue.

However, the Law Society says the burden of proof for the new test will fall on the taxpayer involved and not on the Commissioner. 

“The proposed test should not be enacted as it is likely to be ineffective in achieving its stated objective,” Tomlinson said. “If officials are concerned about difficulties in enforcing the existing land gain taxation provisions, then there should be a comprehensive review of those provisions, rather than reform being made on a piece-meal basis.”

The Society also says the proposed test is unnecessary because new property disclosure rules introduced by the Land Transfer Amendment Bill and the Tax Administration Amendment Bill will ease enforcement of the current land sale rules anyway.

Tomlinson also criticised the limited timeframe and lack of consultation behind the proposed legislation, saying discussion of the potential effects deserved more time.

“We strongly recommend that the period for making submissions is extended so that proper consideration can be given to reforms that could inadvertently affect so many,” he said. 



  • by Grant Diggle 25/09/2015 1:32:02 p.m.

    Typical knee jerk Government Treasury RB reaction. The existing law has provision to catch speculators always has. All it ever needed was enforcement by IRD who have failed spectacularly over decades to catch property traders and speculators.
    Now innocent tax payers will suffer because of Government Ministers lack of understanding of the law as it already stands.

  • by SP McKenzie 25/09/2015 1:47:33 p.m.

    I am not sure why this is unfair. If people are buiyng multiple properties then they are presumably making a decision that it will result in some financial benefit for themselves. The new rules are well publicised and I am sure that lawyers can advise on the implciations of them so peopel can take those into account. The possbility of having to sell within two years can then be factored into purchasing (risk / retunr) decisions. Ultimately - it is a question of buisness risk and if you don't want to take the risk associated with a a potential return (greater than the rtuine form depositing your cash at the the bank) then the answer is don't buy. Furthermore, if peope, are atxed then they are only going be to be taxed on theior profit - if they don;t make a profit then teher won;t be any tax - which surely means anyone selling within two years will be getting more cash back than they put in and are therefore likely to be better off. Furtehrmore, purcashesr can priotect against many unforseen events with insurance. Yes, it may be better to overhaul the rules completely in an idelal world but the world id not ideal to say that the bright line test is unfair is, perhaps, overstating the case. If you want unfair then perhaps you should talk to the firts home buyer shut out of the AUckland market.